Speculation is mounting about the price that Belgium’s AB InBev will be willing to pay to tie the knot with SABMiller (LSE: SAB). Press reports and analysts suggest that SAB could receive a friendly approach that would value its equity at between 4,300p and 4,600p a share as early as today.
It’s easy for me to bet on a price tag of at least 4,000p a share, but there are a few reasons why you might do well to cash in today and invest proceeds elsewhere.
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SAB’s stock price has risen over 3% today as a bid from it rival could be imminent. SAB said on 16 September that “there can be no certainty that an offer will be made or as to the terms on which any offer might be made.”
“Shareholders are strongly advised to retain their shares and to take no action,” it added. Less than two weeks later, SAB now trades around the intra-day, 52-week high record that it hit on 16 September.
A year ago, I argued that SAB was the most obvious takeover target in the beer industry, while AB InBev was the most obvious acquirer. Options are thin on the ground, so I reiterate that view — but I do not think a deal will happen at any price.
Equally important, we should consider the financing mix of any bid.
SAB’s undisturbed share price is about 3,000p. The obvious risk is that the parties will not manage to agree a deal priced over at 4,000p, and then you’ll have to forego a very nice capital gain given that its current equity valuation is 3,700p — some 23% above the level that it recorded on 15 September.
AB InBev became the largest brewer in the world, surpassing SAB, when InBev acquired Anheuser-Busch of the US for about $52bn in 2008. A premium of 27% was paid over the record high that AB had recorded in October 2002.
Based on this element alone, a price tag of up to 4,600p seems about right, even though the net present value of synergies suggests a fair take-out price lower than 4,000p, according to my calculations.
The interests of the seller and those of the buyer must be aligned, of course, but AB InBev really needs emerging market exposure, and it may bid up to secure the assets that it needs. So, say that a bid north of 4,000p will surely emerge.
You have two options now: you forego any additional upside potential and take cash to get rid of your holdings right now. Alternatively, you have to be prepared to become a shareholder in AB InBev, betting on the chances of success for the combined entity, as well as taking some additional currency risk if you are a UK-based investor — the deal, which could value SAB north of $100bn, will likely include a significant equity portion (my best guess would be up to 40% of the total value of the acquisition).
A source in the City recently commented: “How could this possibly make it through antitrust? Will ABI just take the regulators on a wild bender?“
Consider that when AB InBev was created it flipped several assets to private equity and trade buyers to preserve its credit rating — some of those assets were later bought back by the seller. Now, if the deal goes through this round of negotiation, I would expect disposals in North America, but it is hard to predict how regulators worldwide will react to the biggest takeover of a British firm. Divestment risk is another factor we should take into account.