Diageo (LSE: DGE) and SABMiller (LSE: SAB) are no stranger to takeover rumours.
And rumours of an impending bid for both companies have reached fever pitch during the past few weeks.
For example, Diageo saw its share price jump 7% in one day last week, after an unconfirmed report suggested that Brazil’s richest man, Jorge Paulo Lemann, might be behind a possible offer for the company.
Meanwhile, last month, it was believed that SAB’s largest peer, Anheuser-Busch InBev and the Warren Buffett-backed Brazilian private equity firm 3G Capital were in talks to make a knock-out offer for the world’s second largest brewer.
Running out of time
As I mentioned above, Diageo and SAB are no stranger to takeover rumours and, with this being the case, it’s difficult to believe the current chatter.
That being said, there could be some truth behind these rumours.
You see, private equity companies like 3G Capital are sitting on piles of cash as they struggle to find investment opportunities. What’s more, with an interest rate hike on the horizon, these companies are running out of time to borrow cash and lock in record-low interest rates.
As a result, the value of takeover deals has exploded this year as deal makers rush to complete tie-ups before interest rates increase.
So far this year, 27 mergers and acquisitions with a value greater than $10 billion have been completed worldwide — a record number of deals.
Attractive targets
SAB and Diageo are both attractive targets for any potential buyer.
SAB is the world’s second largest brewer and dominates several national beer markets around the world. Also, the group is one of the world’s biggest bottlers of Coca-Cola products.
SAB operates franchise bottlers of Coca-Cola products in 10 markets. Non-alcoholic beverages such as water, fruit juices and malt beverages make up around 18% of SAB’s total beverage volumes.
So, SAB is an attractive acquisition target; the company could attract suitors from all over, not just those companies interested in alcoholic beverages. Even Coca-Cola itself could be interested in parts of SAB.
Diageo, too, is an extremely attractive target. The company owns some of the world’s best-selling spirit brands, including Smirnoff Vodka and Johnnie Walker whiskey. Brands such as these, which have a high level of customer loyalty and international recognition, will be attractive to any buyer.
Time to buy in?
Should investors buy Diageo or SAB ahead of a potential deal? The answer to this question should be no; it’s never a good idea to try and second-guess possible takeovers.
However, Diageo and SAB are no ordinary companies.
The two beverage companies are sector leaders and have generated impressive returns for investors over the past decade. Diageo and SAB have outperformed the FTSE 100 by 95% and 259% respectively over the last ten years.
Moreover, the two beverage giants support appealing dividend yields that will provide you with a steady income if a takeover fails to materialise.
Diageo currently supports a dividend yield of 2.8%, and the payout is covered twice by earnings per share. SAB yields 2.2%, and the payout is covered 2.1x by earnings per share.
Diageo and SAB trade at forward P/Es of 21.1 and 21.5 respectively.
