ABI-SAB: Older ... Budweiser?
We have transplanted the assumptions we used in our 'quick and dirty' analysis of ABI
acquiring SABMiller into a DCF calculation and come to a similar conclusion: it could
afford £42 per share (6% more than our previous estimate). Above this, we believe value
destruction would set in. We wonder if the fact that its approach has been made public will
make it harder for ABI's management to maintain financial discipline, if it has heightened
investors' and analysts' concerns around the company's 'go it alone' revenue growth
strategy.
This note is one for hard-core valuation nerds (maybe 'enthusiasts' would be politer). We have pulled
together a DCF model for the acquisition of SABMiller by ABI, notwithstanding a comprehensive lack of
incremental information from either company. There were a number of reasons for this.
• It is theoretically the most robust method to value any investment, even if there are practical
difficulties in its application; (acute sensitivity to discount and terminal growth rate assumptions being
the obvious ones).
• In light of the inherently complex nature of SABMiller's financial reporting - largely a function of the
significant role played by associates and JVs - we found it a useful way of clarifying the interaction
between moving parts of the P&L and cash flow.
• It forced us to consider issues not picked up by our initial P&L multiple approach, notably working
capital (a US$2bn opportunity, we estimate) and capital expenditure.