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SABMiller- US DoJ approval for merger and current trading update

George Salmon | 21 July 2016 | A A A
SABMiller- US DoJ approval for merger and current trading update

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SABMiller has announced a first quarter trading update which shows net producer revenue (NPR) growing by 2% at constant exchange rates (CER).

Alan Clark, Group CEO, described the results as another quarter of good underlying momentum, although headwinds persist in some markets, notably the USA, China and parts of Africa.

In line with the CEO's comments, the Group have seen NPR and volumes decline by 2-4% (at CER) in North America and Asia Pacific, while Europe, Africa and Latin America saw NPR growth of 5-6% at (CER).

Currency movements remain a drag, given that SAB reports in US dollars. On a reported basis, group NPR declined by 4% for the quarter.

In a separate press release, the Group announced that the US department of Justice has given its clearance for the proposed combination of AB InBev and SABMiller. This is the 21st jurisdiction to give approval.

Proposed acquisition of SABMiller by AB InBev (26 July 2016):

Anheuser Busch Inbev (AB Inbev) have proposed an improved all-cash offer of £45.00 per share for SABMiller, after some SABMiller shareholders raised concerns about the terms of the deal following a steep drop in the value of sterling. The improved offer represents an increase of £1 a share on the original cash offer of £44, which had been recommended by the SABMiller board on 12 November 2015. AB InBev declared its revised offer 'final', meaning it will not be able to raise its offer again.

Under the terms of the revised offer, SABMiller shareholders will still be entitled to a final dividend of USD 0.9375 per share, which is due to be paid in August 2016.

AB InBev is still waiting for certain regulatory approvals in relation to the proposed takeover. The EU cleared the merger in May but said that AB InBev must sell SABMiller's entire beer business in Europe. US antitrust regulators have also approved the deal, after AB InBev agreed to divest SABMiller's entire US business, including its stake in MillerCoors.

Should the transaction fail to close as a result of the failure to obtain regulatory clearances or the approval of AB InBev or SAB shareholders, AB InBev has agreed to pay SABMiller a reverse break fee of $3 billion.

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.

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.