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AB InBev raises bid for SABMiller

Charles Huggins | 7 October 2015 | A A A
AB InBev raises bid for SABMiller

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Anheuser-Busch InBev (AB InBev) has announced that it has made an offer to acquire SAB Miller to the company's Board, for £42.15 per share in cash.

AB InBev has privately made two previous cash offers for SAB - the first at £38 per share and the second at £40 a share. However, AB InBev say that, so far, SABMiller's Board have refused to enter into meaningful discussions regarding a transaction.

The cash proposal represents a premium of approximately 44% to SABMiller's closing share price of £29.34 on 14 September, when speculation about an approach resurfaced.

SABMiller has two major shareholders, Altria and BevCo, who between them own approximately 41% of the company. AB InBev is making a partial share alternative targeted at these two investors, which values SAB somewhat below the cash terms available to open market investors. Altria (27% shareholder) has issued a statement supporting a merger, and the partial share alternative.

AB InBev say that the deal will create one of the world's leading consumer products companies. Given the largely complementary geographical footprints and brand portfolios of AB InBev and SABMiller, the combined group would have operations in virtually every major beer market, including key emerging regions with strong growth prospects such as Africa, Asia, and Central and South America.

AB InBev will likely have to agree to a series of divestitures to obtain regulatory approval, and have said they will work proactively with the regulators, particularly in the US and China, to address any regulatory requirements.

Our view:

AB InBev's takeover approach for SABMiller does not surprise us, having long been rumoured. The industry has been consolidating for many years and both AB InBev and SAB have been at the forefront of this, growing into the number one and two players, respectively. The acquisition would allow AB InBev to realise significant cost savings, and further economies of scale.

In the UK and Europe, SAB is best known for Foster's, Peroni and Grolsch, but its biggest strength lies in emerging markets. Over two thirds of sales come from these regions, with dominant local brands across Latin America, Africa and South Africa. SAB's emerging market sales are growing well ahead of sales in Europe and North America, explaining AB InBev's interest in SAB. Many of the countries in which SAB is strong, such as South Africa, Peru and Columbia, are where AB InBev is weak, which is another key attraction for the deal.

But in North America, SAB owns MillerCoors and AB InBev owns Budweiser. This complicates the merger process because AB InBev will have to agree to a series of divestitures to obtain regulatory approval, which will take some time. With MillerCoors the asset most likely to have to go, no-one will be too upset.

Terms of a deal have yet to be agreed; indeed there is no assurance that they will be. It could be an all-cash offer, or a mixture of cash and shares. The latter option would likely require AB InBev to list in London alongside its existing New York and Belgian listings. SAB are unlikely to agree to anything other than a full price, given the strength of their existing businesses, which MillerCoors aside, generally seem to have good growth prospects.

Should a deal fail to be agreed, SAB's share price could see some weakness, especially given it now trades on a price to earnings ratio (P/E) of c. 24x, which is around a 40% premium to its long run average. Having said that, we think SAB has a strong business which should perform well in the longer term, whether as a standalone entity, or as part of a larger group.

Alan Clark, Chief Executive of SABMiller, commented:

"Growth accelerated in the second quarter of the year, underpinned by our unmatched footprint in the growing beer markets of the world.... While adverse currency movements have materially impacted our reported results, we have a strong business with exceptional long term prospects. Our strategic priority of driving superior top line growth through strengthening our brand portfolios and expanding the beer category is showing clear results."

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.