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 A merged group would have a market value of around $275 billion at
current prices, and would combine AB InBev's dominance of Latin
America with SABMiller's of Africa, both fast-growing markets, as
well as their breweries in Asia.
"The real attraction is Africa, where AB InBev has no presence, as
well as some add-ons in Asia and Latin America," said Societe
Generale analyst Andrew Holland.
AB InBev and other top brewers are trying to move into new markets
as they look to shrug off weakness in North America and Europe,
where consumers increasingly choose craft beers made by independent
players or wine or spirits.
SABMiller, the world No. 2 and maker of more than 200 beers
including Peroni, Grolsch and Pilsner Urquell, said on Wednesday it
had been informed that AB InBev intended to make an offer which it
would have to do by Oct. 14 under British rules.
AB InBev, controlled by 3G Capital, a private equity fund run by a
group of Brazilian investors, confirmed its approach. 3G, known for
its focus on cost cuts at the expense of marketing, has previously
orchestrated takeovers of Burger King, ketchup maker Heinz and Kraft
Foods.
A source close to SAB said it was too early to say what it would do
since no offer has been made.
"At this stage, we’re in wait and see mode," said the source.
Speculation about a merger, likely to raise antitrust concerns in
markets such as the United States and China, has swirled for years.
The timing of the approach, after more than a decade of acquisitions
by AB InBev, follows a roughly 15 percent drop in SABMiller's share
price since August.
"It's exactly the moment they've been waiting for," said Morningstar
analyst Phil Gorham. "It makes sense financially for the first time
in years."
AB InBev will have to pay at least 40 pounds ($62) per SAB Miller
share, and maybe as much as 45 pounds, according to analysts -
implying an overall price of up to $130 billion, including
SABMiller's debt.
That would make it the biggest M&A deal of 2015, already shaping up
to be a record year since the 2008 financial crisis in terms of deal
volume, and one the five largest takeovers since 1980.
Shares in SAB closed up 19.9 percent at 36.14 pounds, giving it a
market capitalization of $90 billion. AB InBev's were up 6.4
percent. Rivals Heineken, Carlsberg and Diageo also rose on
speculation SAB might seek another merger as a defense strategy, as
it did last year when it offered to buy Heineken, but was rebuffed.
Since then it has combined its African soft drink bottler with that
of Coca-Cola, and in recent weeks there has been speculation about
it combining with Diageo or Australian drinks firm Coca-Cola Amatil.
The global beer market share of AB InBev, maker of Budweiser, Stella
Artois and Corona, was 21.1 percent in 2014, while SABMiller's was
15 percent, according to industry experts Plato Logic. Heineken is
the No. 3.
ROOM FOR FUNDING
AB InBev's target for its net debt to core profit (EBITDA) ratio is
2 times, from around 2.5 currently. It is likely to reach that by
2016, the earliest any deal could realistically be completed, and so
has room to borrow to fund any takeover.
When it bought Budweiser-maker Anheuser-Busch in 2008 for $52
billion, the largest cash takeover in history at the time, it let
the ratio rise to beyond 5 times. Going that high again might allow
it to raise as much as $100 billion in debt.
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AB InBev's controlling families own just over half of the company,
while SABMiller's two top shareholders are cigarette maker Altria
and the Santo Domingo family of Colombia.
Altria on Wednesday declined to comment on the AB InBev approach,
but on Sept. 9, its CFO Billy Gifford said at an analyst conference
that it regularly evaluates its SABMiller investment "and at this
time we believe maintaining the asset is in our shareholders' best
interests."
The Santo Domingo family could not immediately be reached for
comment.
Neil Dwane, European chief investment officer, equity, at Allianz
Global Investors, which holds shares in both companies, said AB
InBev had faced increasing pressure to return excess cash to
shareholders.
"ABI is paying a high price but accretion to earnings from low debt
costs would be something in the region of 15 percent. However, we
think the return on this deal could be a relatively disappointing 8
percent after 10 years," Dwane said.
There are significant antitrust hurdles to any combination,
particularly in the United States, where the companies would have
about 70 percent of the beer market.
"The costs that could be saved in the distribution operations are
high - and the antitrust hurdles are higher," said Erik Gordon,
professor at the University of Michigan's Ross School of Business.
A deal would allow Molson Coors to acquire the 58 percent of the
joint venture owned by SABMiller according to the operating
agreement that governs it. A change in control at SABMiller would
automatically give Molson the right to acquire an additional 8
percent and name a new CEO at the venture. Denver-based Molson would
also have the right of first and last offer for the remaining 50
percent stake.
A Molson spokesman declined to comment on whether the company would
be interested in a bid, but Molson shares surged more than 12
percent to an all-time high.
Any merged group may also have to sell interests in China, where
SABMiller's CR Snow joint venture with China Resources is the market
leader. Heineken, Carlsberg or China's Tsingtao could be potential
buyers.
Plato estimates that after disposals, the combined group could end
up with a 28 percent global market share.
AB InBev is being advised by Lazard, while SABMiller is being
advised by Robey Warshaw, JP Morgan and Morgan Stanley.
(Additional reporting by Kate Holton, Alasdair Pal, Freya Berry,
Sinead Cruise, Anjali Athavaley, Jilian Mincer and Emiliano Mellino;
Writing by Christian Plumb; Editing by Pravin Char, Elaine
Hardcastle and Alan Crosby)
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