Ten months almost to the day after the initial rumor surfaced, Anheuser-Busch InBev has officially announced that it is seeking a merger with SABMiller. The beer maker made an official statement today on the matter confirming that it has approached the company:
“Anheuser-Busch InBev notes the announcement made by SABMiller plc. AB InBev confirms that it has made an approach to SABMiller’s Board of Directors regarding a combination of the two companies. AB InBev’s intention is to work with SABMiller’s Board toward a recommended transaction. There can be no certainty that this approach will result in an offer or agreement, or as to the terms of any such agreement. A further statement will be made as appropriate.”
Shares of Anheuser-Busch climbed as much as 5.53% to $115.10 per share in early trading after the announcement was released. SABMiller shares skyrocketed during regular trading hours in London today, climbing as much as 20.65% to 3,637.00 pence sterling per share.
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Analysts from most firms say a deal between the two companies would make sense and result in significant synergies. Sterne Agee CRT analyst April Scee noted this morning that Anheuser has a habit of growing itself by making acquisitions. If the company is able to gobble up SABMiller, it would be a sizeable one at more than 2 times leverage.
Beer market growth lagging
She added that Wall Street might be surprised at the timing of the announcement but probably not the outcome. Growth in the beer market has been weak recently, so the market likely sees an acquisition as being necessary for Anheuser-Busch. Scee sees a combination of Anheuser and SABMiller as a positive mood, especially because of the former’s “credentials” in mergers and acquisitions and also its ability to outperform in quantity and timing of synergies.
The Sterne Agee CRT analyst especially sees SABMiller as a strong acquisition target because of its strong exposure to Africa, which is one of the last remaining growth markets for beer.
Combination would be accretive
Nomura analyst Edward Mundy and his team estimate a combination of the two beer makers to be accretive to earnings by between 14% and 22% by the end of the third year, assuming the China assets and SABMiller’s stake in the Miller Coors joint venture are divested. They expect the business will cover its cost of capital by the end of the eighth year. This estimate assumes a price of 4,400 pence per share. Mundy said because of the wording of the statement on the potential merger, it appears as if part of the deal would come in equity.
Bernstein analyst Trevor Stirling and his team thinks the acquisition price would have to be at least a 30% premium to the closing price on the day before the announcement was made, which would be at least £39 per share. From Anheuser-Busch’s perspective, he thinks the deal will reach return on investment capital of 8% WACC in the seventh year and 9% in the ninth year—much longer than the typical three years the beer maker usually looks for. However, he also thinks the company might see this as being its last major acquisition, so it might be willing to overlook the longer time frame.
SABMiller may push back
The Nomura team thinks SABMiller’s board is not interested in the company being acquired by Anheuser-Busch. SAB recently appointed Jan du Plessis to the position of chairman, and he thinks du Plessis, who he calls a “heavyweight chairman,” will push back against the deal.
Regulatory concerns for a merger too
Scee also sees regulatory concerns for a combination of the two companies and believes that divestures may be required before regulators allow it to pass. However, she sees willing buyers for those assets, like Molson Coors, which might buy the rest of the Miller Coors joint venture with SAB, which owns a 58% stake in the venture. Kirin or Asahi may be interested in the Asia assets, and Anheuser could also sell out of its other joint ventures in Eastern Europe and Russia to cut exposure to that market. Also she says Altria has “recently seemed more willing to participate” in buying any divested assets required by regulators.
The team also sees potential regulatory barriers, especially from the U.S. Dept. of Justice, which they think would “almost certainly insist” that SAB divest its Miller Coors stake in the U.S. He also thinks the China assets would have to have to be divested but agrees with Scee that Molson Coors would be interested in owning all of Miller Coors. He thinks CRE might be interested in the China assets.
Now the market is in watch and wait mode, as by Oct. 14, Anheuser-Busch must either announce a firm offer for SABMiller or announce that it will not make an offer.