Is it time to believe market rumours surrounding SAB Miller (LSE: SAB)?
“Punters order up another round of takeover talk,” is the headline from The Times on Thursday. “Yesterday, in a new spin on the tale, dealers were hearing strong suggestions that SAB has been taking steps to bolster its defences in the event of a move by the purveyor of Budweiser and Stella Artois,” the newspaper added.
Consolidation
If consolidation speeds up in the beer industry, how likely is a takeover of SABMiller?
The answer is very simple: SAB is the most obvious takeover target in the sector, while AB InBev is the most obvious acquirer. SAB would cost more than $115bn, including net debt, yet AB Inbev could certainly pull the trigger. The world’s largest brewer would just have to repeat what it did in the past when InBev merged with Anheuser-Bush: it would load the combined entity’s balance sheet with debt, and would de-lever by selling assets and pursuing efficiencies.
It’s hard to suggest other combinations for AB InBev. Heinken still presents a complex shareholding structure, which prevents a change of ownership, in my view. Furthermore, the Dutch brewer’s assets aren’t particularly appealing, and there is no reason why a suitor would spend £40bn or so to secure a company that offers poor growth prospects and lower profitability than SAB.
In the light of Heineken’s geographical reach, synergies will also be more difficult to achieve. Heineken operates in mature markets where trends for volumes and prices aren’t encouraging, to put it mildly.
Elsewhere, Carlsberg is the smallest brewer in the top four. It may be acquired at some point, but its brands portfolio is much less enticing than that of its larger rivals. Foster’s, which was bought by SAB at the end of 2011, was the last public asset available on the market. What’s next depends on AB InBev, whose management may soon need to act to deliver value to shareholders.
SAB Standalone
And if SAB remains independent, what does the future hold for its shareholders?
SAB stock still offers long-term value at this price, although it trades at a significant premium compared the shares of most rivals. Revenue are unlikely to surprise on the upside for some time, but even if growth sputters, operating profitability will be in region of 30%. SAB is cutting costs to become a leaner entity, so growth in earnings per share (EPS) won’t be a problem. According to market estimates, EPS will grow by 18%, 10.4% and 7.2% in 2015, 2016 and 2017, respectively.
The brewer is also expected to grow dividend payments by 12%, 10% and 9.2% in the next three years. I think these estimates are reasonable, although some pressure may build up towards the end of 2015. Then, SAB will likely implement another round of cost cuts to please investors if it doesn’t find valid alternatives (reads: acquisitions).
Incidentally, its balance sheet is sound.
Market Reaction
Investors don’t seem willing to buy into the rumours surrounding SAB. The only alternative to a takeover by AB InBev would be a merger with Diageo, but I struggle to find merits in such a tie-up. The stock was down 0.8% in early trade on Thursday. SAB’s valuation has been boosted by takeover talk for years, so it’s easy to dismiss such speculations right now. But if consolidation accelerates, and if the beer sector follows the same long-term pattern of the tobacco industry, SAB will certainly receive an offer sooner rather than later.
