AB InBev Need for SABMiller Mega-Deal Grows: Real M&A

Slowing growth at Anheuser-Busch InBev NV and a dearth of big takeover targets may finally drive the world’s biggest brewer to swallow its $79 billion rival, SABMiller Plc.

After AB InBev boosted revenue more than fivefold in the last 10 years with the help of $91 billion of acquisitions, growth for the maker of Budweiser and Stella Artois is forecast to slow over the next decade, according to analysts’ estimates compiled by Bloomberg. Tapping into SABMiller’s presence in faster-expanding regions such as Africa would allow AB InBev to get that growth flowing again, shareholders Alpine Woods Capital Investors LLC and Henderson Global Investors said.

SABMiller Chief Executive Officer Alan Clark told Bloomberg News in January that the case could be made for a tie-up, even though it would likely require divesting some U.S. operations to appease regulators. Sanford C. Bernstein & Co., which dubbed an AB InBev-SABMiller combination “MegaBrew,” estimates it would have almost half the global beer profit pool. The deal would increase earnings at AB InBev immediately if it paid a 30 percent premium for SABMiller in cash, data compiled by Bloomberg show. Cost cuts could drive profit even higher.

“It’s such an obvious next -- and indeed last -- big move by the very acquisitive AB InBev,” said Matthew Beesley, head of global equities at London-based Henderson Global Investors, which oversees $125 billion, including shares of AB InBev. “There’s also clearly some strategic rationale to the deal, neatly filling all the geographic holes AB InBev talks of wanting to fill.”

Workable Deal

A representative for Leuven, Belgium-based AB InBev declined to comment on whether the company is interested in pursuing a deal with SABMiller.

“You could get the numbers to work,” SABMiller CEO Clark told Bloomberg News in an interview during the Beer Summit in Scottsdale, Arizona, in January. “There would be value loss and value destruction because they’d know that they’d have to sell the U.S. though.”

He declined to say whether there have been any discussions or how likely such a deal may be. Richard Farnsworth, a spokesman for London-based SABMiller, also declined to comment.

AB InBev and SABMiller were built into the No. 1 and No. 2 brewers through a series of acquisitions. InBev NV bought Anheuser-Busch Cos. in 2008 for about $61 billion including net debt, the largest deal in beer history. SABMiller acquired almost 50 companies in the last decade, including Foster’s Group Ltd. for about $13 billion in 2011, according to data compiled by Bloomberg.

Sales Trends

AB InBev shares slid 2.5 percent today to 74.09 euros, giving the company a market value of about 119 billion euros ($164 billion). SABMiller fell 1.2 percent to 2,893 pence, valuing the maker of Grolsch and Peroni at 46.5 billion pounds ($77 billion).

In 2013, AB InBev earned about 80 percent of its normalized earnings before interest, taxes, depreciation and amortization from the U.S., Canada, Brazil and Mexico, the company said last week. Normalized Ebitda excludes non-recurring income or expenses.

Like competitor MillerCoors LLC, the U.S. joint venture between SABMiller and Molson Coors Brewing Co., AB InBev has been battling sluggish sales of mainstream brands in the U.S. amid economic pressures and a shift in consumer preferences toward craft beers, spirits and wine.

AB InBev’s compound annual sales growth rate in the last 10 years was about 18 percent, according to data compiled by Bloomberg. Analysts estimate it will slow to about 4 percent over the next 10 years, the data show.

Branching Out

An acquisition of SABMiller would give AB InBev more than $7 billion of revenue in Africa with brands including Castle and almost $4 billion of sales in Asia, reducing AB InBev’s dependence on the Americas and Brazil, data compiled by Bloomberg show. With Latin America representing SABMiller’s biggest market, a deal would also broaden AB InBev’s presence in countries such as Colombia, Ecuador and Peru. Its Latin American brands include Cristal and Aguila.

“SAB has a lot of emerging-market assets, and in particular, in areas where AB InBev doesn’t necessarily have too much influence,” Bryan Keane, a money manager at Alpine Woods, said in a phone interview. “Right now, AB InBev does not have a lot of business in Africa and SAB is a large player there. That’s one of the areas where beer consumption is growing, and it would allow AB InBev to further diversify the business.”

Purchase, New York-based Alpine Woods owns AB InBev stock among the $4.5 billion of assets it oversees.

‘Incredible Undertaking’

While AB InBev and SABMiller operate in largely separate markets, antitrust authorities probably would require SABMiller to sell its stake in MillerCoors and possibly its stake in a Chinese joint venture, according to Jonathan Fyfe, an analyst at Mirabaud in London.

SABMiller also has pre-existing sales agreements globally that may have to be renegotiated, such as its joint venture with Groupe Castel in Africa, Fyfe said in a phone interview.

“It’d be an incredible undertaking,” he said.

Even so, investors have cheered the prospect of a merger in the past. A report by Brazilian news website IG in October 2011 that said the two companies were in deal talks triggered the biggest gain in SABMiller shares in three years.

SABMiller’s stock price has been weighed down this year, falling 5.6 percent through last week, amid concern that growth in developing markets won’t be as strong as expected and headwinds from currencies including the South African rand and Colombian peso.

Earnings Bump

Any offer to create “MegaBrew” now could reach about $120 billion, including SABMiller’s $16 billion of net debt, said Trevor Stirling, an analyst at Sanford C. Bernstein in London. That translates to about a 30 percent premium to its stock price last week.

At that price, earnings per share could climb by about 3 percent this year and 9 percent in 2015, according to data compiled by Bloomberg. Even at a 50 percent premium, a deal now would boost earnings in 2015, the data show. That’s without assuming potential synergies.

“Whereas a deal has been strategically sensible, for a while, it’s been financially impossible,” said Beesley of Henderson Global. “We are now in the financially possible zone, although maybe not quite yet the financially optimal zone.”

AB InBev could probably strip out costs and improve profitability after the transaction closes, though there’s less “low-hanging fruit” than in previous deals such as Anheuser-Busch, said Stirling of Sanford C. Bernstein.

Given the size of the transaction, it would be “a stretch, and massively complex,” though still feasible, he said.

Acquisition Opportunities

AB InBev already has $39 billion of net debt, which is 2.3 times its trailing 12-month earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. Felipe Dutra, the company’s chief financial officer, said last week that after it pays down debt and reduces its leverage ratio to 2, “you should expect us to be combining a dividend and buyback to keep capital structure around the optimum level, provided there is no M&A, which we can never predict.”

Acquisitions remain “a core competency, and we will always be ready to look at opportunities when and if they arise,” Dutra said.

While a deal may not happen immediately, it’s possible in three to five years as beer makers such as AB InBev look for ways to continue growing, Keane of Alpine Woods said.

“For the most part, the global beer market is not a high-growth business,” he said. You have pockets of strength, which is more on the emerging markets side of the world. But if these businesses are looking for growth, consolidation is one way they can do it.’’