Ab InBev; Market Cap: €157.9bn ($179.8bn) as of 09/10/2015
SABMiller; Market Cap: £59.7bn ($91.54bn) as of 09/10/2015

 

Introduction

On Wednesday October 7, Anheuser-Busch InBev announced a £65bn ($99.62) offer, or £42.15 per share, for SABMiller, which was swiftly rejected by the UK based company. It was the third bid by Ab InBev, after the first two all-cash private offers, £38 and £40 per share, were both rejected. The proposal values SABMiller’s Enterprise Value at estimated £75bn ($117bn), making it the third biggest deal in history. The deal has already gained attention of all the media and Anti-Trust authorities, as it would create one of the largest companies in the world by Market Cap, selling every third bottle of beer in the world and making half of the global revenues.

Anheuser-Busch InBev Overview

AB InBev is a Belgium based global brewing and beverage company with 155,000 employees and operations in more than 100 countries. The company builds itself up with serial M&A activities, which are led by 3G Capital, largest shareholder of the company. AB InBev has become the largest global brewer with 25% global market share and $47.1 billion total sales. In addition, the company has a portfolio of more than 200 brands and 16 of these have individual retail sales figures exceeding $1 billion such as Corona, Skol, Brahma and Budlight. Considering the financial figures, AB InBev has been an outstanding player in the industry with 60% gross margin, 32% EBIT margin and a 20% profit margin, which are quite attractive figures for the shareholders. Moreover, the company has an organic growth rate of 5.9% which excludes the impact of currency movements and M&A activities.

SABMiller Overview

SABMiller is a multinational brewing and soft drinks company headquartered in London. It employs more than 69,000 people in 80 countries. The company has a balanced spread of operations with a significant presence in developing markets, particularly in Africa. The company drives 72% of its EBITA (Earning Before Interest, Tax and Amortization) from developing markets indicating the strong ability of the company in these regions. As a result of this strong position, in November 2014, SABMiller struck a deal with Coca-Cola to distribute its products in Africa and the deal makes SABMiller the largest Coca-Cola bottler in the region. As of March 31 (reporting period of the company is from 1st of April to 31st of March), SABMiller announced global revenue of $22.1bn, a 1% drop from 2013 and EBITA of $6.4bn. The revenue and EBITA figures have been affected negatively by the depreciation of currencies in developing markets. In fact, both revenue and EBITA have increased by 6% when we consider organic growth and constant currency basis.

Deal Structure

This latest bid is a combination between an all-cash offer of £42.15 per share, which represents a 44% premium, and a mix of AB InBev shares and cash. The second alternative is available for 41% of outstanding shares. According to Ab InBev, this solution provides a continuing, attractive investment for Altria Group Inc. and BevCo Ltd. (who together hold approximately 41% of SABMiller shares).

The partial share solution is structured as 0.48 InBev shares and £2.37 in cash for every SABMiller share, which based on InBev share-price of €100 equates to £37.94, a 10% discount compared to the all-cash offer. The new shares will carry voting rights, however they will be unlisted and untradeable for a 5-year lock-up period, after which they will be substituted with normal Ab InBev shares.

 

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This is the third bid by AB InBev on SABMiller, with the last two offers having been made on September 15 and September 22. AB InBev also made a bid for rival Heineken in September 2014.

Because of the desire of both Brazilian and Belgian founding families to not have their voting rights diluted, it is likely that significant debt will have to be raised. Ab InBev is said to have already asked several banks to underwrite up to $70bn in debt. In order to maintain a debt-to-equity ratio of 60 to 40 for the deal, approximately $40bn in equity will have to be raised in addition.

Brewing Industry

The global brewing industry is fairly consolidated among four largest brewing companies; ABInBev, SABMiller, Heineken and Carlsberg which accounting for 50% of the global volumes. The growth in the global beer industry is around 3% for the last 10 years. However, consumer preferences, category dynamics and growth opportunities have been changing dramatically. At this point, it would be beneficial to divide the analysis between developing and developed markets.

–  The developing markets, especially Africa, Latin America and China, provide solid growth opportunities for the brewing companies since consumers’ disposable income has been increasing, which also boosts the per capita beer consumption. Affordability, availability and quality of the products are holding key importance for the consumers in these regions. As a result, companies are looking for opportunities to attract consumers with lower prices, higher quality and well-developed distribution channels.

–   In developed markets, the industry landscape is quite competitive and challenging since per capita beer consumption is decreasing and the industry faces little or no growth year over year. There are numerous reasons for this decline such as increasing fragmentation of consumer preferences, changes in the nature of drinking occasions and the ageing population who prefers less sparkling beverages.

In the United States, which is the largest market for beer, global companies have been struggling with a separate challenge: the growing consumer preference for “Craft Beers”.  These small companies, producing small amounts of beer, are able to focus on quality, flavor and unique brewing techniques that prove attractive for consumers. In 2014, volume sales of the craft beer companies increased by 18% although the overall market stood still. As a result, companies like AB InBev have faced diminishing market shares and volumes in the United States. AB InBev, alone, has purchased four U.S. craft breweries since 2011 to keep up with the market.

Rationale

According to AB InBev, the combined entity will generate total revenues of $64bn and EBITDA of $24bn. Although there exists several reasons why such a deal could prove strategic for both parties involved and investors, the most apparent is the clear complementary nature of the markets in which both brewers operate.
Besides the clear geographic consideration, there is also a temporal one. Over the last several years AB InBev’s traditional strongholds, namely the United States and Brazil have begun to show signs of weakness. By accessing SABMiller’s market share, and in particular in Africa, some of these concerns about local economic exposure can be diversified away.
By the same logic, SABMiller’s board has come out strongly against the deal, claiming that the firm, even on this third offer, is not being adequately compensated for the future cash flows it expects to receive from the region. Moreover, SABMiller argues that the deal would face regulatory challenges since the combined entity may create antitrust issues in the US and China. However, AB InBev stated that it has been prepared to overcome these regulatory issues by divesting some of their operations in the key markets. This would also help pay off the large debt pile AB InBev has accumulated.

Although they say: “third time’s a charm”, if the current offer is not enough for main shareholders Altria and BevCo to agree to, it is possible a higher bid will be submitted before the deadline of October 14.

Advisors

AB InBev has retained as advisers Lazard and law firm Freshfields.
SABMiller is being advised by Robey Warshaw, JPMorgan Chase, Morgan Stanley and Goldman Sachs

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