SABMiller gained as much as 24% on Wednesday as rumours once again re-surfaced that Anheuser-Busch Inbev NV (or ABInbev for short) had acquisition aspirations.
By the close SABMiller had added around $14 billion (R180 billion) taking the the company’s market cap to a whopping $90 billion. SABMiller makes up around 10% of the Top40 index and the rapid increase managed to drag our local market up around 3.64%. According to Bloomberg, this is the biggest one day movement in SABMiller since shifting its primary listing to London in 1999.
Is this mega deal viable?
The acquisition of SABMiller would be the biggest in the industry’s history and solidify more than a decade of consolidation in the brewing business. It would make it one of the six biggest deals in human history and, if the deal were to go through, “SABInbev” would produce one out of every three beers world-wide.
You’ll hear many a market commentator point to the “overlap” (see picture below) as a reason why the deal is viable and, in fact, likely. Excluding the US and China, the geographic footprint looks like a carefully constructed puzzle.
The problem comes that both companies are present in the world’s number one and two economies. ABInbev may have the larger portion of US sales, while SABMiller is more prevalent in China, but this duplication will come with competition issues. And it’s not just the regulatory hurdles that indicate there is no “end-game” brewing.
When you actually look at the possible deal terms (and please pop me a mail if you want more detail: email@example.com) it looks as if it will be very difficult to unlock value for shareholders at these prices.
What have the companies said so far?
Well, actually very little has been said.
Speculation started when both management teams excused themselves from different broker conferences simultaneously.
Apparently ABInBev told the media that it had approached SABMiller’s board about a “combination of the two companies”. It added that there was no certainty the approach would lead to an offer or an agreement, saying it wanted to work with the board of SABMiller “toward a recommended transaction.”
In reply, SABMiller has published a SENS announcement entitled, “Response to press speculation” in which it said:
“The Board of SABMiller notes the recent press speculation and confirms that Anheuser-Busch InBev SA/NV (“ABInBev”) has informed SABMiller that it intends to make a proposal to acquire SABMiller. No proposal has yet been received and the Board of SABMiller has no further details about the terms of any such proposal.”
So, what will happen next?
The best guess is probably nothing.
By their very nature, monolithic deals are slow moving and involve kilometres of red tape and unforeseen obstacles.
Firstly, SABMiller would have to exit its Molson Coors Brewing Co JV in the US and ABInbev would likely have to sell SABMillers’ 49% stake in CR Snow, its Chinese brewing partner. The companies would also have to win shareholder approval, the very thing which scuppered SABMiller’s deal with Heineken last year.
At that stage, experts hypothesised the entire merger with Heineken was purely to make SABMiller more resilient to a take-over from ABInbev. The Heineken family, which owns a controlling stake, chose to preserve its “independent heritage”.
If the SABMiller management were looking to retain control, and make SABMiller a more challenging take-over target, you’d better believe they’re going to demand a significant premium to their ruling share price. Most analysts have this pegged at around a 30% premium to Tuesday’s share price. But I wonder if management will be more reluctant now that the company is already trading 20% higher.
One of the conspiracy theories doing the rounds in dealing rooms, is that SABMiller executives are open to talks around merger prospects specifically because it will prevent a deal. If the the market believes a deal is in the works and buys up SABMiller stock, the likelihood of a deal dissipates, as its unlikely ABInbev would want to proceed with an offer, when faced such expensive SABMiller scrip. The paradox being, the more management embrace a potential deal, the less likely it is to succeed, and the more likely they will maintain control.
On a less conspiratorial note, the sell-side does tell us the deal has the backing of not only SABMiller management but also Altria, one of SABMiller’s major shareholders.
Show how long before we know more?
According to “Rule 2.6(a) of the Code, ABInbev must, by not later than 5:00 pm on 14 October 2015, either announce a firm intention to make an offer for SABMiller or announce that it does not intend to make an offer for SABMiller”. This deadline will only be extended with the consent of the Takeover Panel.
What are we doing at Rand Swiss?
Any deal between the two is likely to be “messy and expensive”. But, exaggerated stock price movements do bring opportunity. The beer market has been fairly stagnant of late. Mega-cap brewers have been losing business to wine, spirits and craft brew competitors. Volume growth has been flat (excuse the pun) and, with SABMiller’s EM market currencies under pressure, we’re using this opportunity to take profit.
Our local model equity portfolio holds an 8% stake in SABMiller and we’re using the 20% spike to unload around half. We still like the company, but with this rapid appreciation it’s time to manage our risk.
We can also see from our order book, our short-term traders have increased short-positions and are betting on a retracement back towards R700. No doubt some traders are balancing out their holdings ahead of the Fed announcement tomorrow.
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