SABMiller could fetch £40 a share, but not yet
Ken Odeluga September 16, 2015 10:21 PM
<p>Updated 1715 BST AB InBev back for another round US volume decline spurs world’s No.1 and No.2 brewers into action SAB price could be […]</p>
Updated 1715 BST
- AB InBev back for another round
- US volume decline spurs world’s No.1 and No.2 brewers into action
- SAB price could be £40/share
- Delays and uncertainty could push stock lower first
We’ve been here before.
A year ago, almost to the day, it emerged Belgium’s Anheuser-Busch InBev was talking to banks about financing what could be an offer to buy FTSE 100- listed SAB Miller for £75 billion.
Fast forward to autumn 2015, and news that the same pair are set to begin talks comes around again.
Shares in SABMiller sharply extended modest early morning gains after reports that Anheuser-Busch InBev intended to make an offer.
The world’s largest beer maker by sales subsequently confirmed it intended to “work with SABMiller’s Board toward a recommended transaction.”
It added that there was no certainty anything would come of any subsequent talks.
Bear in mind that there are no talks going on right now.
There’s no proposal either.
That of course begs the question: why are SABMiller shares riding 20% higher as I write this?
That brings me back to Wednesday’s news being a re-tread of ground covered at least a year ago.
That’s how long investors have been calling for another round of beer sector consolidation, particularly among European firms.
Don’t forget, Anglo-South African SAB, the world’s No.2, itself tried and failed to buy Dutch beer giant Heineken last year.
The driver of that potential deal was the same as the one reported today.
Beer volumes are evaporating globally.
At least that’s the perspective of the beer giants.
Beer industry consolidation crafted in the US
In the US, MillerCoors (a JV of SAB with global No.7, Molson Coors) is No.2, with a market share of 26% whilst AB InBev is No.1, with 44%.
But MillerCoors, with brands like Miller Lite, Coors, and Blue Moon, warned as recently as Monday that its US sales volumes would continue to decline for “the next few years”.
MillerCoors said last month sales to wholesalers fell 1.9% to 30.8 million barrels in the first-half of its financial year.
AB InBev, the maker of Budweiser and Bud Light, said in July its H1 wholesale revenues fell 3.5%.
This slippage isn’t new.
MillerCoors said volumes have contracted by nearly 10 million barrels since the JV was formed seven years ago.
But it’s unlikely Americans are turning teetotal in droves.
Instead, US drinking habits are subtly changing.
The emergence of scores of new small, independent ‘craft’ breweries in recent years, catering to more specialised tastes is challenging established brands and their owners.
The number of regional breweries, microbreweries and brewpubs in the States jumped 19% last year to 3,418, according to industry data.
That’s the picture in the US, where total beer consumption is bested only in China.
There are similar trends elsewhere.
In No.1 beer guzzler China, data from early this year showed volumes were about 7% lower year-on-year in the last three months of 2014.
Consumption trends were holding up better in Latin America and other big drinker regions like Africa, and at least modestly in Europe.
Still, the need by the world’s beer giants to get ahead of the curve is clear.
SAB could fetch £40 a share
So much for the rationale for some sort of tie up by AB InBev and SAB, but will it work this time?
First there’s the question of price.
Back-of-beer mat calculations show the combined company would be worth about £250bn, making it the biggest in the industry by far.
By last night’s close, SAB’s market capitalisation was £49bn.
In terms of leverage, you will find much worse than SAB in the sector.
AB InBev’s debt clocks in at 108.4% of its equity value, whilst the UK’s Diageo is even less frugal.
It would have to pay five times the value of its equity to clear its debt.
SABMiller’s total debt is a little more than half of its total equity.
In short, SAB would be a good catch; among the best in the European sector.
That means AB InBev would have to pay very close to top dollar to land its intended.
There’s no scientific way to work out exactly how much SAB might cost.
But InBev may have set its own precedent when it paid the equivalent of 11 times the amount of Anheuser-Busch’s projected EBITDA (earnings before interest taxation, depreciation and amortisation) to get that acquisition done in 2008.
However, SAB’s EBITDA margin is growing faster than all of its close rivals save for AB InBev.
That suggests a better premium on SAB’s ability to convert gross revenues.
13 times SAB’s 2014 EBITDA of around $6.6bn equates to c. $86bn.
Paying off the UK-based brewer’s $12.5bn total debt would lift the takeout price to just short of $100bn.
That would be equal to a 35% premium to SAB’s ‘undisturbed’ price per share (at Tuesday’s close) of 3014p, for a total market cap of £49bn ($75bn).
The result would be about 4000p for UK shareholders.
Froth will settle further
Despite Wednesday’s 20% gain, SAB stock settled off highs and about £4 short of the widely mooted bid price.
During takeovers, share-price-to-bid-price disparity tends to suggest an element of doubt among investors.
In this case, shareholders will be well aware of how aggressive US antitrust regulators have been in the past.
American watchdogs would probably seize on the MillerCoors JV first.
AB InBev owns 58%.
Chinese regulators might eye SAB’s Snow brand.
Rivals like Heineken, Carlsberg and Diageo could pick up the scent of these sales, muddying the rationale of doing the initial mega deal in the first place.
From AB InBev’s point of view, one advantage could be that the biggest holders of SAB, Altria and Colombia’s Santo Domingo family would probably settle for shares in the new group.
The cash part of a deal could be reduced to $59bn.
Either way, with SAB’s shares just 3% away from their all-time high of 3857p (on 15th September 2014) and no confirmation of an offer from ABI yet, SAB shares are likely to retreat in coming sessions.
With completion perhaps months but more likely years away, bearish traders are likely to be attracted.
Wednesday’s bound took the stock through all major moving averages.
The 200 and 100-day recently crossed around 3352-3364p.
That makes that price region an obvious lower target.
The closely-watched 61.8% interval down from Wednesday’s rise equates to 3312.84p, potentially bolstering the level suggested above.
The weaker 50-day MA closed at 3254p.
That’s close to a previous support around 3107p that held between early August 2014 and August 2015 before breaking.
It might now have been reinstated.
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