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Should Investors Give Up On A Bid For SABMiller plc And Buy Diageo plc Or Fevertree Drinks PLC?

Touted as one of the world’s largest takeover deals ever, Anheuser-Busch InBev’s offer to buy SABMiller (LSE: SAB) is taking some time to finalize. 

The Takeover Panel has already twice extended the deadline for AB InBev to make a firm offer for SAB but no offer has materialized, and it looks as if the market is starting to doubt that the deal will go ahead. 

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Indeed, despite having announced an “agreement in principle” of £68bn, SAB’s market value remains depressed. At time of writing, the company’s market cap. is only £65bn, a full £3bn below the proposed offer price. 

The market is right to be concerned, as the two parties haven’t yet made the deal official. What’s more, even if the two set of management do agree on a price, the merger still has to get the green light from regulators around the world. 

And if the deal does fall through, it’s possible SAB’s shares will fall back to the level they were at before the offer was made public — around 20% below current prices. With this being the case, it might be wise for risk adverse investors to sell SAB, take the cash and run. 

Slow and steady 

If you are thinking of selling SAB, Diageo (LSE: DGE) could be an excellent replacement for the company in your portfolio. Over the past ten years, Diageo’s revenue has increased at the steady rate of 4.1% per annum.

Earnings per share have risen by 42% over the same period, and the company’s per-share dividend payout to shareholders has increased 80%. The company’s defensive nature has protected investors from the market’s turbulence for the past decade.

Including dividends, Diageo’s shares have returned 9.4% per annum, outperforming the FTSE 100 by approximately 4% p.a.. Diageo currently trades at a forward P/E of 21 and the company’s shares support a dividend yield of 3.1%. 

Surging ahead

Fevertree Drinks (LSE: FEVR) is another company that could be a great replacement for SAB in your portfolio.  There’s no other way of putting it — Fevertree has had a stellar run since it came to market at the end of last year. Indeed, since its IPO, Fevertree’s shares have leapt more than 210% in just 11 months, outpacing the majority of the wider market. 

And the majority of these gains can be traced to the company’s impressive underlying business performance. For example, for the six months to the end of June 2015 Fevertree reported revenue growth of 62% to £24.1m, adjusted earnings before interest tax depreciation and amortization rose 68% to £7.2m, and 83% of adjusted EBITDA was converted into operating cash flow.

Following this positive performance, a further trading update issued by the company at the beginning of this month notified the market that results for the full year will be materially ahead of board expectations. 

However, while Fevertree’s performance is highly impressive, the company’s shares are extremely expensive. City analysts expect the company to report earnings per share of 9.4p for 2015, which indicates that the company is trading at a forward P/E of 46. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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