AB InBev Pursuit of SAB Seen Benefiting From Heineken Rejection

SABMiller Plc’s failure to erect a defense against Anheuser-Busch InBev NV by combining with Heineken NV has left the world’s second-largest brewer even more vulnerable to a takeover by the industry leader.

Heineken said yesterday that it rejected an approach from London-based SABMiller, an overture that intended to help fend off a possible bid for the Miller Lite maker by AB InBev, according to people with knowledge of the matter. SABMiller is assessing its next move, the people said, yet its options are now more limited and the ball is in the Belgian giant’s court to move forward with a long-speculated takeover.

“That SABMiller’s inorganic options have been so publicly lessened puts ABI in an even stronger position, should it choose to make a move on SABMiller,” Eddy Hargreaves, an analyst at Canaccord Genuity, said in a note today. “SABMiller shareholders may be even more likely now to welcome a bid.”

Karen Couck, a spokeswoman for AB InBev, declined to comment, as did SABMiller spokesman Richard Farnsworth.

SABMiller shares surged as much as 13 percent in London today, the most in almost 12 years, as speculation of an offer from AB InBev intensified. The gain boosted SABMiller’s market capitalization to more than 61 billion pounds ($99 billion), a valuation that would make a deal the industry’s biggest ever.

Beer Behemoth

Shares of drinks companies from Guinness brewer Diageo Plc to Carlsberg A/S also advanced as the approach for Amsterdam-based Heineken fueled excitement about the potential for more deals. Beer industry stocks, stoked by merger speculation, are trading at their most expensive levels in ten years, based on forward price-earnings ratios, according to analysts at Nomura.

While SABMiller could still seek other partners, such as Danish brewer Carlsberg, “the fact that SAB’s management seem so serious about the need to defend themselves does add credence to the ABI-is-going-to-buy-SAB story,” Jonathan Fyfe, an analyst at Mirabaud Securities, said in a note.

AB InBev, based in Leuven, Belgium, has spent close to $100 billion over the past decade to purchase brews from Corona to Budweiser. Acquiring SABMiller would create a global beer behemoth, merging AB InBev’s strength in the U.S., Mexico and Brazil with SABMiller’s presence in Africa, China and Australia.

A bid would be complex, analysts say, possibly requiring divestitures of SABMiller’s joint ventures in the U.S. and China to appease regulators. And AB InBev risks a cut to its credit ratings should it pursue a takeover, researcher Fitch Ratings said Sept 9. Still, “there are no insurmountable challenges” to the deal, Fitch said.

Bottling Agreements

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 selling some assets in the U.S., home of the company’s MillerCoors LLC joint venture, to appease regulators.

One sign that a deal might be in the works is if AB InBev declines to renew a soft-drink bottling agreement with PepsiCo Inc. in Latin America, which is similar to one that SABMiller has with Coca-Cola Co. in Africa. AB InBev must give notice by next year at the latest if it does not want to continue with the agreement beyond 2017, at which point it automatically renews, according to Canaccord’s Hargreaves.

“If a move for SABMiller is indeed planned, then ABI would almost certainly give Pepsi notice in the fairly near future,” Hargreaves said. The agreement with Coca-Cola is the more attractive of the two arrangements as it is in a less-developed market, according to Fitch’s Giulio Lombardi.

Balance Sheet

Another indication is AB InBev’s balance sheet. The ratio of net debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, has declined to about 2 times, a level that makes a bid “feasible,” according to Hargreaves. That ratio could expand to as much as 7.2 times if a deal was funded entirely by debt, Fitch said, yet the combined entity’s cash flow could bring that down to 3.3 times within two years.

An offer with some equity component would be more attractive to SABMiller’s two largest shareholders, Altria Group Inc. and Colombia’s Santo Domingo family, according to Morningstar analysts.

However it pans out, SABMiller is now “in play,” said Wyn Ellis, an analyst at Numis Securities.

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