AB InBev’s offer to buy SABMiller (LSE: SAB) has ended around a decade of will-they-won’t-they speculation.
AB InBev now looks set to hike the amount it’s prepared to pay for SAB ahead of the deadline on Wednesday, after the latter rejected a £42.15 per share offer last week. Under Takeover Panel rules, AB InBev must make a formal offer to acquire SAB by 5 pm on Wednesday or walk away for six months.
Colombia’s Santo Domingo brewing dynasty, which owns 14% of SAB and has two board seats, voted to reject the first offer put forward by AB InBev. The suitor needs to appease this majority shareholder before a deal goes ahead.
However, it is now believed that AB InBev could raise its offer for SAB to £44.00 per share, a full 750p or 20% above SAB’s current price. If a higher offer is rejected once again, AB InBev could decide to make an offer for Diageo (LSE: DGE) instead.
No stranger to bid talk
Diageo is no stranger to bid talk. Over the summer it was reported threat Brazil’s richest man, Jorge Paulo Lemann, was weighing up a bid for the company via his private equity firm 3G Capital. 3G’s flagship investment is AB InBev, so if the AB InBev’s deal with SAB falls apart, it’s likely 3G could swoop on Diageo.
It seems that no acquisition is too big for 3G. During the past year alone the company has been rumoured to be looking at acquiring both Coca-Cola and Pepsi. But the private equity group is perhaps best-known for partnering up with billionaire Warren Buffett, for the acquisition and merger of Kraft Heinz.
Still, having said all of the above, AB InBev is unlikely to swoop on Diageo. The group has stated in the past that it intends to remain a beer company for the foreseeable future. And it’s easy to see why. The spirits market is much more complex than the beer market, with marketing costs accounting for a larger portion of sales. Marketing costs for distillers tend to be in the high-teen percentages as a proportion of sales, versus high single digits for brewers. Diageo’s operating margin currently stands at 29%, 4% below AB InBev’s operating margin of 33%.
But even if AB InBev did try and pounce on Diageo, there would be competition concerns just like with SAB. City analysts have stated that the possibility of regulators allowing such a deal is slim.
Quality for a price
Away from the world of mega-mergers, there’s a chance that Fevertree Drinks (LSE: FEVR) could become a bid target.
I should say that, as yet, there’s nothing to suggest that Fevertree is in play, but the company has all the qualities of an attractive bid target. Growth is taking off, the company is debt free, and operating cash flow doubled during the first-half of the year. City analysts expect Fevertree to report earnings per share of 9.3p for full-year 2015 and 10.8p for full-year 2016.
Unfortunately, Fevertree’s growth doesn’t come cheap. The company trades at a forward P/E ratio of 46, falling to 40 next year.