AB InBev Still Interested in SAB Miller Acquisition?

In the aftermath of 3G Capital’s involvement in the merger of Kraft Foods and H.J. Heinz Company, speculation has continued about what that means in 3G Capital’s other spheres of influence. That includes any expansion plans by AB InBev, whose largest shareholder is Jorge Paulo Lemann, one of 3G Capital’s three founding partners. Does AB InBev currently have enough capital options to take over SAB Miller? Such an acquisition might even dwarf the concept of macro beer. In an analysis by Timberwolf Equity Research circulated by SeekingAlpha.com, the question of a merger hinges on other financial hurdles beyond financing.

An excerpt from the report follows:

“At the beginning of the year, reports surfaced that 3G was raising funds with the intention of investing in the food and beverage industry. Names of potential targets included companies such as Campbell Soup and Kellogg but also much larger companies such as PepsiCo and even Coca-Cola. In the end it turned out they had created a deal where Kraft would be merged with Heinz, with Lemann associate Bernardo Hees at the helm.

“Regarding AB Inbev there will surely be more deals, but the main question is whether or not it will make a move for number 2 brewer SABMiller. The rumor mill has been running for a long time speculating about a potential bid for this company, which would create a dominant beer company on all continents except Europe. The main obstacles to a bid by AB InBev would first of all be the deal's monstrous size, and secondly, SABMiller's already quite lofty market valuation. At the current price it remains to be seen whether AB InBev could make the economics behind such a deal work. What usually drives their value creation is the ability to cut costs, which they have done at all the breweries they have bought but most famously so at Anheuser-Busch. SABMiller, however, already has an above industry-average operating margin at 19.9% (FY2014). While AB InBev's management is likely to find plenty of possibilities to shave off costs, it is unlikely the opportunities would be as plentiful as they were at Anheuser-Busch.

“On top of that SABMiller currently has a market capitalization around $87 billion with net debt over $22 billion (FY2014). These numbers amount to an enterprise value for the company around $109 billion excluding any take-over premium. Even with AB Inbev's enormous earnings power it is likely a deal would require a significant amount of newly-issued AB InBev shares. At a current earnings multiple on SABMiller's stock over 22 and a similar level for AB Inbev, any investment case for a deal involving a stock issuance by AB InBev appears shaky at best because the company would be at risk of giving up more than it receives. On a FY2014 basis SABMiller's EV/EBITDA multiple is almost 16.5, which is very high for such a large brewer and also substantially higher than what Inbev paid for Anheuser-Busch in 2008 (around 12.4). The multiple is probably a bit lower using the financials for the current fiscal year (ending March 2015) but not very much so. Of course, they would be able to monetize the 58% interest in MillerCoors, held by SABMiller, which would have to be sold anyway because of regulatory issues but such a sale is unlikely to substantially bring down the capital outlays required for this deal. Especially now that 3G has made a move with its Heinz investment, a deal involving SABMiller has become less likely."