SABMiller share issue puzzles market
By David Robertson | 16 July 2002
It was not the ideal start to life as a new company when SABMiller cancelled its $950m share placement only hours after announcing plans to raise the money. But as David Robertson reports, the real mystery is why the company needs the cash so soon.
South African Breweries and Miller Brewing joined forces last week but has faced a roller-coaster ride ever since.
SABMiller, the new company, announced at 7am on Wednesday that it would be raising about $950m in a share placing. The 120 million shares were to be sold by JP Morgan and Cazenove to institutional investors after shareholders agreed the move at an extraordinary general meeting on July 1st.
But by 9pm the deal had collapsed as the Dow Jones Industrial Average dropped 282 points and the FTSE 100 dropped 122 points.
"In light of prevailing market conditions, SABMiller has decided, in the best interests of its shareholders and the company, not to proceed with the proposed placing of ordinary shares," the company said.
Yell, the telephone directories group, Focus Wickes, the DIY retailer, and Prada have all shelved flotation plans in recent weeks for the same reason.
But whatever the "prevailing" market conditions this has been an embarrassing way for the new company to start business. Market instability is nothing new in the present environment and if JP Morgan and Cazenove had not factored this into their estimations of how easy the shares would be to sell then this debacle reflects very badly on them.
But SABMiller is still keen to raise the cash and the company may still go ahead with the placement in the near future. So let us assume that the money will soon enter the company's bank account and consider why the world's second largest brewer needs nearly a billion dollars in such a hurry.
"SABMiller says the cash will be used to fund acquisitions "
"The funds are there to give us flexibility," spokesman Nick Chaloner says. "We are an active participant in the consolidation of the industry. In developed and developing market we have established positions and we will look to enlarge those operations. We have a deal pipeline that is fairly full, there is a lot of existing work done in markets where we already have a position."
SABMiller is understood to already be in talks with Shaw Wallace in India and Bavaria in Colombia. It is also looking at expanding in China and Africa and such an early statement of intent could be seen as a blueprint for the way the company will continue snapping up brewers across the globe.
But the deals available will most likely be in the $50m to $100m range raising questions about why such a large sum is being raised. Senior executives of rival brewers told just-drinks that they believe SAB may have begun to realise that Miller needs more of a revamp than they expected and that the revenue raising is more about refinancing Miller than simply filling gaps in SABMiller's regional portfolio.
SAB has paid US$5.4bn for Miller. It has assumed US$2bn of debt and paid US$3.4bn to Miller's former owner, the tobacco giant Philip Morris, in a deal that has made the company the second biggest brewer in the world. For SAB the deal was always going to be attractive because it dilutes the company's exposure to the troubled rand - South Africa accounts for one-third of business now compared with two-thirds before the merger.
But Miller has been under performing for some time as its key Miller Lite brand has struggled against Bud Lite and Coors Lite despite a marketing budget that stands at 13% of turnover. One of the issues SAB will have to address is how to get the most from this vast marketing budget. Miller is also losing ground in the US because it lacks a significant premium beer - the one area that is performing well.
SAB will try to plug this gap by introducing some of its brands like Pilsner Urquell. But to really get the US business working there will have to be substantial investment in all the areas that are weak: marketing, distribution, infrastructure and premium brands. With SABMiller already carrying $2bn of Miller's debt, the company is unlikely to be able to push that figure too much further which might explain the need for a share issue.
"You have US$2bn debt and US$950m from a share issue," said a leading analyst. "The issue in people's minds is: are these two things connected."
The need to concentrate on the US business was apparent in the trading update released this week, which stated that while Miller's second quarter performance was in line with the same period last year, first quarter sales were down. This was blamed on poor weather during spring in the Midwest and Northeast.
Another, albeit unlikely, possibility for the share issue money is that it will be used to complete another mega deal with one of the big European brewers. Speculation last year focussed on a three-way deal between SAB, Miller and Scottish & Newcastle - which has the UK license for Miller Genuine Draft. But the chances of SABMiller completing another big deal soon are almost zero, not least because raising money before announcing a deal is a rather unusual way of alerting everyone to what is going on.
"Nobody will do anything with them until we see which way Miller is going," said Deutsche Bank analyst Graham Eadie.
Even if SAB does turn Miller around shareholders are understood to be cool towards the prospects of a deal with S&N. There would be little in the way of cost synergies and SABMiller would not give S&N any new brands capable of competing with the likes of Stella Artois, Becks, Heineken or Carlsberg.
Analysts have been surprised at how quickly SABMiller has tried to tap into the share issue facility but what has really worried them, and the institutional shareholders, is why the money is needed (the company's share price dropped 5% the day the issue was announced). The answer is that SABMiller needs it to complete acquisitions - as it said. Not just the plethora of deals in places like India and China but also to complete the acquisition it has just done. Suddenly the Miller deal is beginning to look a little more expensive.
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