Shares in beer giant SABMiller (LSE: SAB) rose by around 3% this morning after the world’s largest brewer, Budweiser owner Anheuser Busch InBev SA, announced a new £42.15 per share proposal for the firm.
The proposed bid represents a 44% premium on SABMiller’s share price before AB Inbev’s interest became public, but it may not be enough to win over SABMiller’s board.
At 9.16am, SABMiller issued a statement pouring cold water on AB InBev’s latest offer. SABMiller said that the firm’s board had already agreed to reject a proposal at £42. This suggests to me that today’s £42.15 proposal might not be enough to swing a deal.
SABMiller’s board will now meet to discuss today’s proposal, after which a further response is expected. However, the firm’s share price has slipped back to under £37 following SABMiller’s announcement, suggesting that the market is pricing in another rejection.
What are the issues?
Based on SABMiller’s comments this morning, this deal faces two main obstacles.
The first is that SABMiller knows it has a strong hand, thanks to its crown jewel — a large share of the fast-growing African and Latin American beer markets.
SABMiller reported sales growth of 9% in Africa and 8% in Latin America during the first half of the year. It doesn’t need a deal, as chairman Jan du Plessis made clear in his comments this morning:
“SABMiller is the crown jewel of the global brewing industry, uniquely positioned to continue to generate decades of standalone future volume and value growth for all SABMiller shareholders from highly attractive markets.”
The other issue is that SABMiller’s board believes that at £42.15 per share, AB Inbev’s offer undervalues SABMiller.
According to SABMiller, a £42 offer only values SABMiller at 14.7 times earnings before interest, tax, depreciation and amortisation (EBITDA), based on earnings for the year ending 31 March 2015. SABMiller’s board claims that this valuation represents a discount to comparable transactions.
Today’s 15p increase on a £42 may not be enough, especially as SABMiller also has reservations about the partial share offer being included for the firm’s two largest shareholders, Marlboro owner Altria Group, and BevCo Ltd.
Don’t give up
I don’t believe that SABMiller shareholders should lose hope.
Despite the reservations of SABMiller’s board, the firm’s largest shareholder, Altria Group, has already indicated that it would back an offer of £42.15 or higher.
This could put serious pressure on SABMiller’s board to engage with AB InBev and tweak this latest proposal into an acceptable format. Under UK stock market rules, AB InBev has until 14 October to make a firm offer — so there’s still plenty of time.
Ultimately, I suspect that a deal is quite likely, so I wouldn’t sell SABMiller shares at the moment. A bigger profit could be in the pipeline.
Indeed, the current share price is around 12% below the value of AB Inbev’s latest proposal. Buying today could generate a quick profit, if a deal is eventually agreed.
