The greatest beer transaction ever
● Greatest beer transaction ever: Anheuser-Busch InBev (ABInBev) finally presented
its formal offer for the share capital of SABMiller. With a transaction value of
GBP71bn, this represents the largest beer deal ever. The combined company will
dominate the beer markets in Africa and both North and Latin America, materially
raising the growth profile of ABInBev.
● 80% of EBITDA in countries with 50%-plus market share: We cannot think of any
other company that can boast a statistic like this. Not only will the NewCo be
selling one-third of all the beer consumed on the planet, it will do so with an
enviable market position in most of the individual markets that matter. In
addition, the group will benefit from the stability that increased geographical
diversification can bring – the largest market is the US with 22% of sales – and will
have, on top of that, one of the strongest growth profiles among the large global
brewers given its high exposure (66% of FY 2017E EBITDA) to emerging markets.
● Earnings can double by 2020: Integration of SABMiller can increase EPS from
USD5.33 FY 2015E to USD9.73 by FY 2020E. Our calculations suggest ROIC can hit
a WACC of 7% by year four when synergies are fully delivered.
● Synergies of USD2.0bn are conservative: There is no structural reason why
SABMiller’s Latin America and Africa EBITDA margins should not converge with
those of ABInBev in North America or Brazil. Applying the former’s margins to
SABMiller subsidiaries yields USD1.3bn of synergies. Applying the latter’s yields
USD2.9bn. USD2.0bn of synergies realised over four years (USD1.4bn announced
plus SABMiller’s cost savings) is conservative.
● All regulatory hurdles are addressable: We believe ABInBev faces regulatory
issues in 13 countries. In most of these markets, either SABMiller or ABInBev has a
dominant position while the other imports brands. In the UK, Russia and Italy
combined share will approach 30% and regulators here may request concessions.
However, the potential impact on cost synergies is limited. ABInBev has
announced the conditional disposal of SABMiller’s North America business for
USD12bn and we believe Chinese brewer CR Snow will follow (USD3.1bn).
● ABInBev becomes our top pick in beverages: Execution risks remain, but
ABInBev’s management has the best M&A track record in the industry. With the
resulting company holding more than a 50% market share in countries that
cumulatively account for 80% of FY 2017E EBITDA, it is feasible for the shares to
trade on multiples in line with major consumer goods peers such as Nestlé (22.6x
FY 2015E P/E). Applying a target P/E multiple of 20x to FY 2020E earnings and
discounting back gives us a 12-month price target of EUR143 (26% upside). We
therefore upgrade to Buy and add ABInBev to our stable of ALPHA stocks.
● Limited upside for SABMiller as a standalone: With both companies agreeing
terms and the cash offer for shareholders set at GBP44, we see limited upside to
the standalone company. We do not envisage regulatory issues beyond Miller
Coors and CR Snow acting as a stumbling block to the deal. We raise our price
target to the cash offer price of GBP44 and downgrade SABMiller to Hold.
● SABMiller’s recent results: The group recorded 20bp of EBITA margin expansion
driven by cost savings and efficiency gains in Africa and Asia-Pacific, although
some of this benefit was offset by adverse currency movements in Latin America
and competitive pressures in Poland. Reported group NPR, EBITA and adjusted
EPS declined by 12%, 11% and 11% respectively and the continued depreciation of
emerging-market currencies remains a significant headwind.