MegaBrew Mug Is Only Half Full: Tara Lachapelle

MegaBrew is finally fermenting. And while AB InBev and SABMiller are still wrangling over price, the common wisdom is that the long-awaited merger of beer giants will probably get done.

It’s just that investors might need to temper their expectations about what it will accomplish.

Wall Street is understandably excited about the idea of an AB InBev-SABMiller combination. For one thing, it would be the biggest deal of the year, topping $100 billion. Second, we’re talking about beer.

But strip that away, and you’re left with a marriage of two slow-growing corporate behemoths running out of ways to deliver higher profits to shareholders. 

Revenue for each is projected to climb at an average rate of about 5 percent compounded annually over the next six years, according to estimates compiled by Bloomberg. That’s not particularly impressive. We’re reaching the point where the world drinks about as much beer as it ever will, save for some developing markets, in which brewers will be fighting for share. There are also only so many possible innovations to be had in this industry, and that’s where the microbrewers are winning.

AB InBev is offering 42.15 pounds per share, an increase from prior bids of 40 pounds and 38 pounds a piece (shareholders can alternatively elect to receive restricted stock instead of all cash, though AB InBev is assuming most will go for the all-cash offer). While SABMiller says the price is still far too low, AB InBev probably won’t walk away just yet. It’s got SABMiller’s largest shareholder, tobacco giant Altria, on its side urging further talks. AB InBev also has some financial wiggle room.

It the bid were raised to 45 pounds a share and paid mostly with cash, AB InBev’s 2016 earnings would rise by a minimum of 3 percent, according to data compiled by Bloomberg. That’s before accounting for cost cutting opportunities, which could, in theory, double the accretion.

If AB InBev really wants to get this deal done, it has that option of raising the offer again. But keep in mind that any earnings jolt probably won’t last for long. Analysts from Exane BNP Paribas have said that consolidation may give a much smaller boost to industry profits over the next decade than it has in the past.

Plus, there is the question of economic profit. This isn’t discussed nearly enough, but should be, given an increasing number of mega-deals. Economic profit takes into account not just the explicit costs of buying another company and the resulting earnings gain, but also the return on capital invested in the target and what other opportunities the parties miss out on because of the transaction. It essentially provides that 20/20 hindsight to answer the question: Was this the best move?

AB InBev’s debt could wind up at 5 times Ebitda or higher, a leverage ratio that will take time and a lot of cash flow to pay down. And management will have to be focused on integrating the businesses, maybe shedding assets at the request of regulators, and cutting costs. Basically, AB InBev is going to have to live and breathe this deal for years. That’s an opportunity cost.

It’s not that this merger is bad or value-destroying. SAB InBev, or InBeviller, or whatever they call it, will undoubtedly be a more valuable company and even stronger force in the world of malted barley and hops. But whether apart or together, these businesses will still be subject to the same growth challenges as any other corporate giant.

In other words, assuming the deal gets done, how many years before an activist shareholder at the new beer behemoth starts calling for spinoffs and asset sales?

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