SABMiller is in an offer period following the previously advised takeover approach by AB InBev. In order to keep the market informed during the offer period, SAB has brought forward the release of its second quarter trading update. This reveals modestly improving growth trends in the second quarter, with net producer revenue (NPR) growing by 6% at constant currency (down 9% at actual currency) and volumes up by 2%. By contrast, NPR grew by 3% in Q1 and volumes were flat. The improvement was driven by a better performance from the lager category, where volumes rose by 1% (Q1: -1%). Soft drink volumes rose by 4% in Q2, in line with Q1. The shares fell by 2% in early morning trading.
Geographic performance in Q2 (organic, constant currency basis)
- Latin America - Growth accelerated in the second quarter, with NPR growth of 9% (Q1: +6%) and beverage volume growth of 7%, supported by particularly strong performances from Columbia and Peru.
- Africa - Growth also improved in the second quarter with NPR growth of 11% (Q1: +7%) and beverage volume growth of 6%, with good growth in the premium segment in South Africa.
- Asia Pacific - Group NPR grew by 4%, in line with Q1, as continued momentum in the higher priced premium category offset weaker volumes, which were down 3%.
- Europe - Group NPR grew by 3% in Q2 (Q1: -4%), with beverage volumes flat (down 6% in Q1). The improvement was driven by good weather and stronger mix, although Poland remained weak.
- North America - This was the only region to report worsening trends. NPR was down 2% in Q2 (flat in Q1) with volumes down 3%, reflecting another weak performance from MillerCoors.
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."
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