An Anheuser-Busch InBev takeover of SABMiller has been rumoured for so long that people might be tempted to take its merits at face value, but several analysts think the drawbacks and obstacles in such a deal outweigh any advantages.
Buying SABMiller, which has operations in 80 countries, is a considerably riskier deal than AB InBev’s leadership has attempted before — with either its 2008 acquisition of Anheuser-Busch or its 2013 deal to buy Mexican brewing giant Grupo Modelo SAB.
One issue is price. AB InBev’s courtship of its smaller rival was confirmed on September 16, when SABMiller was forced to put out a statement by Britain’s takeover regulator after its shares moved on media speculation. The publicity could make it harder for AB InBev’s management to “maintain financial discipline”, said RBC analyst James Edwardes Jones. Above an offer price for SABMiller of £42 a share, or about $US103 billion ($146bn), “any acquisition would move into the realms of value destruction”, he said.
The pay-offs probably wouldn’t come quickly, either. If AB InBev were to buy SABMiller for £39 a share — a premium of about 30 per cent to SABMiller’s share price before the takeover approach — it would take seven years for the return of capital from the deal to exceed SABMiller’s underlying cost of capital, said Bernstein analyst Trevor Stirling.
Another issue is how the deal would be structured, given that SABMiller’s largest shareholders, Altria Group and the Santo Domingo family of Colombia, would prefer shares over cash for taxation purposes. AB InBev also would have to navigate a variety of likely antitrust concerns in jurisdictions such as the US, some South American countries and possibly China.
While 3G Capital Partners, the private-equity firm run by some of AB InBev’s controlling shareholders, has a reputation for wringing costs out of the businesses it acquires, SABMiller is widely seen as an efficiently run business already, meaning AB InBev should expect fewer synergies as a percentage of sales than it realised in prior acquisitions.
“We are not convinced that the potential acquisition of SABMiller would work culturally or strategically,” said Mr Edwardes Jones, who downgraded AB InBev’s shares following the announcement about a possible takeover of SABMiller and cut his price target on the stock.
SABMiller’s dominant position in Africa — where it operates on its own or through partnership in 37 countries — was widely seen as a key driver of AB InBev’s interest in the company, but some analysts posit that operating on the continent would present a raft of challenges for AB InBev.
“The margins AB InBev has enjoyed have been top-of-class, but the structural costs in Africa will be higher,” said Barclays analyst Kenny Lam, noting that infrastructure limitations in Africa force brewers to operate breweries in virtually every country they sell in. That doesn’t fit with AB InBev’s business model, “which is about scale and efficiency,” Mr Lam said.
Selling SAB’s sub-Saharan Africa business would reduce the risk and complexity of a deal but would also “significantly reduce” the combined company’s prospects for growth, Mr Stirling said.
SABMiller chief executive Alan Clark has emphasised the company’s soft-drink portfolio as an engine for growth, something Mr Lam predicts would take a back seat in the combined company. “It could be a major strategy change,” he said. Soft drinks now make up 22 per cent of SABMiller’s total sales by volume, compared with 17.2 per cent in 2009. By contrast, AB InBev gets 10 per cent from its sales by volume from non-beer categories, including soft drinks and other products such as cider, up from 9.1 per cent in 2009.
The two companies had different approaches to ownership, Mr Edwardes Jones said. Mr Clark owns 298,000 shares of SABMiller, compared with an estimated 2.39 million shares held by AB InBev CEO Carlos Brito, he said.
SABMiller and AB InBev declined to comment.
While SABMiller does not mind taking a back seat on certain businesses, AB InBev likes to stay in control. Roughly 30 per cent of SABMiller’s earnings last year came from entities it doesn’t control, but AB InBev’s share of such income was just 0.1 per cent, illustrating a distinctly different attitude toward how to make profit.
With SABMiller’s and AB InBev’s respective roles as bottlers for Coca-Cola Co and PepsiCo there is a chance that one of those lucrative relationships might have to be jettisoned given the rivalry between the soft-drink makers. “In a transformational deal you would expect some sort of give-and-take on the overall strategy, but this would be more than a give-and-take, it would be a fundamental overhaul,” Mr Edwardes Jones said.
By Saabira Chaudhuri
Source: The Wall Street Journal via The Australian
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