Comment - SABMiller, Castel tie-up makes sense

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  • US$9.5bn bid price labelled "crazy"
  • Deal logic makes sense
  • SABMiller could prefer Castel to Foster's

Leaving aside the rather flimsy source material for SABMiller's supposed move on Castel's beer operations in Africa, this is a deal that may be a case of when, not if.

A two-day analysts' trip to Uganda, one subsequent note from Deutsche Bank and a speculative report in the Times newspaper is all it has taken to produce a wave of speculation on SABMiller's impending swoop for Castel's African beer operations.

Castel was this morning (7 October) quick to deny any suggestion of talks between the two companies, while sources close to SABMiller have intimated that Castel's assertion is correct. As for the prospective bid price of GBP6bn (US$9.5bn), that was labelled as "crazy" by ING Bank analyst Gerard Rijk.

"It's a ridiculously high amount," Rijk told just-drinks. He estimated that this would be upwards of 30 times expected EBIT for the beer arm, when FEMSA Cerveza sold at a multiple of 12.5 times at the start of this year. SABMiller, too, is famed for its 'careful' attitude towards asset valuation.

All that said, there is a neat logic to a merger between SABMiller and Castel's Les Brasseries & Glacieres Internationales (BGI). SABMiller would significantly expand its footprint in Africa, which, alongside Latin America and parts of Asia, is a hotly-tipped beer market of the future.

"For every brewer it makes sense," said Rijk, who added that between $3bn and $4bn might be a more realistic price tag.

Analysts estimate privately-held BGI to have annual volume sales of around 20m hectolitres. This is less than SABMiller sells in South Africa alone, but BGI commands a dominant position in several African markets. It has an 85% volume share of the beer market in Cameroon, which has a per capita beer consumption of 25 litres - one of the highest in Africa. BGI also has a strong position in Angola, where per capita consumption is 37 litres, and leading positions in Algeria and Tunisia.

The firm also has around a 50% market share in Ethiopia, according to a report published in May this year by investment research group Access Capital. Beer consumption in Ethiopia is set to rise by 15% per year over the next five years.    

SABMiller sees Africa as an extension of its own backyard and a deal for Castel would tighten its grip on the continent. Castel is also a big player in soft drinks, which fits nicely with SABMiller's ambitions.

There is history between the two firms. They have been in a strategic alliance in Africa since 2001, when South African Breweries (SAB) took a 20% stake in BGI in return for BGI acquiring a 38% holding in SAB's pan-Africa subsidiary, excluding South Africa. As a result, SABMiller and BGI work together in 19 African countries.

Although BGI also works with other brewers, notably Heineken and Carlsberg in Cameroon, its partnership with SABMiller would surely put the Peroni Nastro Azzurro brewer in the driving seat for any buyout. Rijk believes that, of the potential rivals in a bidding battle, Heineken has too much on its plate, Anheuser-Busch InBev would not be interested in markets that are so "fragmented" and Carlsberg has its sights set on Asia.

Deutsche Bank said that Castel's BGI already contributes a significant amount to SABMiller's profits in Africa and it is hard to disagree with its opinion that BGI is a much more compelling deal for SABMiller than, say, Foster's Group's Australian beer business.  
One burning question remains, and that is whether or not family-owned Castel wants to sell up. Chairman Pierre Castel is 60 years old and there is speculation that the next generation would be amenable to a sale. In addition, Castel sold off its water business in 2008 as part of a strategy to refocus the business on wine. It is, after all, one of the world's largest wine merchants.

It could be a slow-burner, but a move by SABMiller for BGI could be more probable than possible.


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