Who are the winners and losers of AB InBev's takeover of SABMiller? - Comment

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As Anheuser-Busch InBev and SABMiller agree to discuss a mutually-satisfactory takeover offer, Larry Nelson looks at who can be considered a winner and who a loser, should the US$104bn purchase go through.

And so it comes to pass, perhaps inevitably. As the headlines have blared today, the board of SABMiller has agreed in principle to a possible recommended offer from AB InBev, one which offers shareholders GBP44 per share in cash. Or, in the case of Altria Group and the Santo Domingo family - SABMiller’s largest shareholders with 27% and 14% equity stakes - a partial share alternative. Prior to the launch of a formal offer, we can expect two-plus weeks of due diligence, and an anticipated unanimous recommendation by the SABMiller board.

The GBP44 offer is pretty much exactly a 50% premium over SABMiller’s closing share price of GBP29.34 in London on 14 September. It’s also a more modest 16.7% advance on SABMiller’s closing value as recently as 5 March of this year. One can only now wonder, if the value of SAB's shares hadn’t collapsed in value in mid-August and languished thereafter, would we be reading of an ABI bid of any sort today?

Yet, fortune favours the brave (or bold); a quality that AB InBev CEO Carlos Brito seemingly possesses in spades. In the imagination, he’s starting to resemble a chess grand master, one who’s at last five moves ahead of his opponents. 

This bid has been on the card for ages yet, seemingly, SAB was unable to prepare a decisive defence in advance. When you’re announcing as late as this past Friday that you can cut your run rate costs by another US$500m by 2020 - or 5% of $10bn annual operating costs – well, you’ve not so much endeared yourselves to shareholders as proven your opposition’s point that it can better extract value than the current management. (And SAB’s figures, strangely, mirror the same argument used by Anheuser-Busch in its defence of InBev’s bid when it trumpeted its Blue Ocean programme as capable of delivering $1bn in annual savings. Again: the right idea, far too late.)

The scorecard

As a small stone creates ripples in a still pond, a transactional boulder of this size is bound to create Tsunami-like conditions for the global brewing industry. There are winners and losers, some immediately apparent; some longer term. Here’s the rundown of how the transaction effects parties interested far and wide:

  • Winner: ABI shareholders

Analysts vary as to how long this transaction will prove to be earnings enhancing but, on the whole, we’re looking at medium-term estimates. If I were an AB InBev shareholder on this bright, shiny morning (and I’m not) I’d be feeling pretty good about upticks in share value and dividend potential.

  • Winner: SAB shareholders

You’re looking at a 50% gain on your investment – yeah, well, it’s time to break out the holiday brochures and give yourself a pat on the back. In the end, SAB’s management probably extracted as much value as they could in this negotiation. 

Make that a big, big winner. SAB’s joint-venture partner in US brewing unit MillerCoors most likely has first (and last) rights of refusal when AB InBev needs to shed SABMiller’s 58% equity stake due to almost-certain regulatory objections. The price tag, estimated at $9bn by brokers Canaccord Genuity, won’t be a stretch for Molson Coors. More importantly, Molson Coors now has an opportunity to redefine its future. Neither Miller nor Coors are performing well in the US – even the most casual beer drinker can identify that American light lager isn’t ‘craft’ – and its market share has been in seemingly inexorable decline.

So, while Molson Coors may well relish the challenges of going it alone – and an opportunity to streamline duplications in the Miller and Coors brand families – it could also invite a new partner to shoulder the burden. Heineken can’t, while Carlsberg might be interested, but its offer would duplicate that of the established ‘import’ Heineken. There’s an opportunity to partner with a brewer unexpected – perhaps Kirin, or Asahi? Japan’s leading brewers have been relatively isolated in the on-going industry consolidation, and they could offer new brands and markets in return. 

  • Winner: China Resource Enterprises

For much the same reasons as Molson Coors – an opportunity to reclaim control of its Chinese market leading JV. If regulators don’t object to a combination of CR Snow with AB InBev’s existing Chinese assets, it may well welcome the Brazilians'-Belgians'. Or, it could partner with Carlsberg, with the Danish brewer a strength in western Chinese provinces – yet this pairing may again face market share regulatory concerns. 

The brewer of Guinness over the last year or so has been tidying up its JVs and minority stakes in brewers around the world. Is it being readied for sale? Beyond the world’s most recognisable stout, the group's beer footprint does offer market strengths in sub-Saharan African markets, namely Ghana, Nigeria and Kenya. The opportunity value of these markets will increase with an AB InBev-SAB marriage. The likely bidder: Heineken, the brewer most likely to capitalise with its experience in African markets.

  • Winner: Pilsner Urquell

The world’s first lager is also the diamond in SAB’s brand portfolio. It is also the leading global beer brand possessed by any multinational that most resembles a craft beer brand. So, there’s scope to position it as a super-premium offering in additional markets globally. That is, as long as its brand authenticity is protected (see ABI’s handling of Beck’s, now not so much German).

  • Winner: Craft brewers

Decidedly so: AB InBev might as well rename itself ‘Goliath’, for that’s how the brewer will be portrayed by craft brewers in all markets of the world for ever after.

  • Loser: Innovation

This isn’t a dig at AB InBev per se; rather, it’s the realisation that work being undertaken by SAB in beer styles and brand development may well perish as AB InBev seeks out cost-cutting duplications post-completion. Put another way: two heads are better than one. For those who had the fortune to wander through Anheuser-Busch’s pilot brewery in St Louis pre-InBev and have wondered what ever happened to hundreds of good ideas, you’ll know what I mean by creative loss. 

  • Loser: The Supply Chain

AB InBev has been under fire for some time now for its payment terms to suppliers. Some fare better than others – raw materials and packaging suppliers generally receive quicker payments than those selling CapEx items such as brewhouses, filtration systems and packaging lines. SAB paid more promptly, on the whole, so there’s a loss. But, again, it is worth noting that in its plans to cut a further $500m in costs, 70% of that was expected to be achieved from suppliers. So, it’s not so much that AB InBev is aggressive on payments terms – it’s just that it’s more efficient in achieving the end result. 

  • Loser: South Africa

The growth of SAB from modest origins into a multinational force has been a source of pride for South Africa and, in a world where power resides as much with multinationals as government’s, helped redress the balance been developed and developing economies. If there remains a listing on the Johannesburg Stock Exchange, that’ll help ameliorate the change in address – but the ownership change is still going to sting.

  • To be decided: sub-Saharan Africa

SAB has taken its African heritage - and the CSR role that is part of this - very seriously. For example, its development of sorghum- and, latterly, cassava-based beers has helped tens of thousands of indigenous farmers to enter the formal economy. This is a responsibility that will soon fall to AB InBev’s senior management – and they would do well to exercise sensitivity. There are possibly costs that could be cut, but there is a much greater social good at stake that should continue to be nurtured. 

In the end, of course, none of this may come to pass. There are still regulatory hurdles to overcome but a willingness to stump up potentially $3bn for a reverse break clause suggests AB InBev is not so much confident but certain that it’s ducks are in a row. 

And so we’ll have a big, brand new brewer, one that, as Carlos Brito has stated time and again, will be "the first truly global beer company", Whether it will be a better world for beer and brewing, we'll just have to wait and see.

For just-drinks' full coverage of AB InBev's battle to buy SAB, click here

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