I thought it could be a roller-coaster ride for SABMiller’s (LSE: SAB) shareholders on Monday, but it may actually turn out to be a fantastic time to be invested in the company. Here’s why.
What’s Going On
SAB approached Heineken over the weekend, and it was rejected quite swiftly. The Dutch brewer’s controlling shareholders intend to “preserve the heritage and identity of Heineken as an independent company”. It isn’t over yet, in my view, although SAB doesn’t need to make a comeback. Or does it? 
According to market rumours, the Heineken family has been approached by SAB as the latter is looking at ways to defend itself from a takeover by AB InBev. So, is the SAB/Heineken story a matter of price or strategy? What’s next?
Market Reaction
The stock of Heineken was up only 2% in early trade, but SAB gained almost 6% in a declining market. The shares of AB InBev have risen by 1.2%, in the meantime. This makes sense: the market is betting on a takeover of SAB, rather than on a change of ownership at Heineken. AB InBev won’t sit on the sidelines for long as its own equity valuation needs deal-making to receive a fillip.
Investors aren’t too worried that SAB may pay over the odds to secure Heineken. They don’t seem bothered by the possibility that SAB will stretch its finances to secure a target that essentially is a play in mature markets. They probably know that Heineken is not an easy target, while the interests of SAB shareholders would be better preserved if it became part of AB InBev.
Problems?
Heineken is not the most obvious cultural fit for SAB, and any bid would have to be largely financed by equity, which means that the Heineken family would end up being one of the largest shareholders in the combined entity. This isn’t good.
Moreover, I think synergies will be more difficult to achieve than in a SAB/AB Inbev combination. The Dutch brewer’s main attraction resides in its Heineken brand, which has lost some of its sparkle of late, in my view. The “emerging market” exposure of Heineken is limited, and the markets where it operates — such as rural Mexico via FEMSA Cerveza — aren’t exactly growing at a fast pace.
Heineken’s founding family controls Heineken via a holding company. As I noted last week, when I wrote that SAB was ripe for a bid by AB InBev, SAB is the most obvious takeover target in the sector, while AB InBev is the most obvious acquirer. “Heineken still presents a complex shareholding structure, which prevents a change of ownership,” I added.
Heineken stock looks fully valued based on its trading multiples. Heineken has a market cap of about 34bn euros, but has also a net debt position of abut 10bn euros, which means the total enterprise value would be about 60bn euros, including a 30% takeover premium. For SAB, such a deal is doable, yet something else may lie ahead for its shareholders…
