My inbox was bombarded by brokers in early trade on Wednesday.
“Sabmiller: Anheuser-Busch Inbev Intends To Make A Proposal.“
The biggest merger in the beer industry — one worth up to $300bn, including net debt — is not a done deal but could be finally just around the corner.
If you are invested in SABMiller (LSE: SAB) and after long-term value, the best advice perhaps came from SAB itself today: “shareholders are strongly advised to retain their shares and to take no action.”
Proposal
The board of SABMiller notes the recent press speculation, the brewer said today, “and confirms that Anheuser-Busch InBev has informed SABMiller that it intends to make a proposal to acquire SABMiller.“
“No proposal has yet been received and the board of SABMiller has no further details about the terms of any such proposal.” The board of SABMiller will review and respond as appropriate to any proposal that might be made, and there “can be no certainty that an offer will be made or as to the terms on which any offer might be made“.
As I argued on 2 September, SAB was already a compelling buy at about 2,900p given that its share price had long hovered around 3,500p on the hope that a bid would emerge, but its fundamentals and trading multiples pointed to a fair value in the region of 3,250p a share.
What’s next now?
By no later than 5.00 pm on 14 October, AB InBev must either announce a firm intention to make an offer for SAB or announce that it does not intend to make an offer for SAB.
SAB stock rose 22% to 3,737p at the time of writing, but there might be room for more capital appreciation, particularly if you consider that such a tie-up would bring what all major brewers around the globe really need to deliver value to their shareholders — costs synergies.
Just how much, though?
4,000p a share
After years of speculations, I think that AB Inbev will now have to pay at least a 30% premium over SAB’s undisturbed share price, which isn’t easy to determine but I estimate at between 3,000p and 3,200p.
Keep in mind this number: 4,000p a share.
That’s the level at which SAB’s equity could be valued, in my view, although such a price target — which would imply a £16bn premium — may be overly ambitious based on the level of projected cost synergies.
Value
In fact, if certain assumptions are made in order to calculate the net present value of projected cost synergies (which must cover the premium being paid by the acquirer), AB Inbev would even struggle to justify a premium of £7.2bn, which would imply a SAB’s stock price of 3,450p. And if SAB was valued in line with the average take-out multiples for beer deals over the last few decades (at about 13x adjusted operating cash flow), its stock could be worth much less that.
That said, the take-out price could be much, much higher, given that the deal would hold a strong strategic logic and that AB Inbev is under pressure to boost its own valuation. Moreover, deals often defy financial and economic merits.
Of course, the economics of the deal will have to be investigated, but those also depend on the resulting financing mix, which will likely include a 30%-40% equity component, in my view. Some disposals will likely be required in mature markets such as North America, but there’s not much overlap on a global scale and SAB’s assets are notoriously well run — so, a high price target for those assets is likely.
To be honest, I wouldn’t sell SAB today, and I’d be prepared to join the AB Inbev family — after all, its management team has historically proved to be very determined when it comes to securing assets and delivering value via M&A.
