Pete Coors Woke Up this Morning with a Smile on his Face

FILED SEPTEMBER 16, 2015

Dear Client:

By now you've likely been assaulted by at least five different news stories on a potential tie-up between AB InBev and SABMiller, as the companies released statements this morning about ABI's intention to bid on the London-listed brewer.

A couple of things we'd like to note here about the deal's effect on operations here in the United States: 1) The newly announced CEO of MillerCoors, Gavin Hattersley, will likely retain this position. As you know, Gavin was the CFO at Molson Coors prior to this appointment, so he has a relationship with Molson Coors, who we believe is the beneficiary in all of this. Molson Coors will likely take full ownership of MillerCoors at a discounted rate.

Therefore, we expect continuity. 2) Due to this continuity, we think the deal will have little effect on operations here in the U.S. 3) EXCEPT for the possibility of ABI becoming distracted with this complex integration, which may take some heat off of their U.S. Division.

If the deal is consummated, the resulting company [as is] would control roughly 1/3 the world's beer. The tie-up has been valued at a potential $250 billion.

ANALYSTS WEIGH IN. Most analysts who tackled the news are not completely surprised with ABI's interest to buy SABMiller and create "MegaBrew," nor do they believe this approach is the first over the last decade: "Furthermore, given that SAB's share price has been so weak in the last 12 months, it makes a deal much more affordable," Bernstein wrote this morning.

Of course, and as we've noted, "There are clearly regulatory hurdles that would need to be scaled" to pull it off: "in particular, the US DoJ would almost certainly insist on the disposal of SAB's stake in MillerCoors in the USA. And ABI might also have to dispose of SAB's 49% stake CR Snow in China. But it is also likely that Molson Coors and CRE would be willing purchasers respectively."

Bernstein believes an offer "would have to be set at least a 30% premium to the undisturbed share price i.e. north of £39."
What about Altria? "It is likely that Altria (27% owner of SAB) would for tax reasons prefer shares for its stake and possibly the Santo Domingo family as well (13% stake)."

When might a deal hit ABI's cost of capital? "ABI may view that this is the last big deal in beer and hence be willing to relax its normal acquisition criteria," per note. "If ABI could achieve synergies of 12.5% of sales (broadly in line with the BUD deal), the deal ROIC hits an 8% [weighted average cost of capital] in Year 6 and a 9% WACC in Year 7" or 8.

To UBS, who also weighed in, the timing makes sense. For them, it wasn't a question "if" ABI would be interested in the acquisition: "the question to us has been 'what level would ABI be able to create economic profit if it bid.'" Before yesterday, SABMiller had underperformed ABI YTD by around -8%, "which may have been a key factor between our analysis at the beginning of the year and today's statements confirming interest."

It referred to its own note in January where UBS had weighed a takeover scenario, pegging SABMiller as the "most compelling" large-scale brewing target. They didn't believe Heineken or Carlsberg as appealing targets for ABI, as those players over-index in European beer geographies (which are "structurally challenged"; SABMiller however is better positioned in growth markets, at least relatively) and they are controlled by either families or Foundations.

As for the question of Altria et al., in UBS's mind: Both they and BevCo will "likely [want] to receive shares in payment for their stakes in SABMiller," per January note. "Altria in particular has held its stake in SABMiller since the sale of Miller in 2002, therefore would, in our view, look to avoid paying a very hefty capital gains tax bill (the SABMiller share price has increased by nearly 7x times over this period). We also believe that the South African shareholder base would have a strong preference for shares."

Today's UBS note concluded that they "continue to believe that ABI management will use its strong free cash generation in shareholder best interest and create value, so we continue to rate ABI as Buy. SABMiller is rated Neutral."

Financial Times had a handy roundup of analyst commentary, noting observations from Exane BNP Paribas that "if a deal doesn't happen soon, it may never happen" due to current favorable conditions in bond and currency markets. "Despite limited synergies and execution risk, a deal would boost EPS and more importantly, help solve ABI's volume issue. Tempting," per note. (It also nodded to SABMiller's "poison pill manoeuvre" last year, where it approached Heineken reportedly to fend off a bid from ABI.)

Until tomorrow, Harry

"I stopped believing in Santa Claus when my mother took me to see him in a department store, and he asked for my autograph." - Shirley Temple

Don't forget to register for Beer Summit 2016 in New Orleans January 25-26 at The Roosevelt hotel. Lineup will be announced later this month. Tickets go quickly, so reserve your spot today: beernet.com/beer_summit.php

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