Opinion: Why Anheuser-Busch InBev Is Approaching SABMiller
9/17/2015
ABI has demonstrated a best–in–class integration and cost–cutting model and is playing into its strength by pursuing SABMiller.
ABI's stock price before releasing its press statement regarding a potential combination with SABMiller was down 17% over past 3 months.
Operating profit in the United States was down 17% year–to–date.
The company's earnings before interest, taxation, depreciation and amortization (EBITDA) declined by 8.2% in the first half of 2015.
The Brazilian economy and faltering beer economics in Brazil were major factors, since Brazil accounted for roughly one–quarter of ABI's EBITDA in the first half of the year. Brazilian debt was downgraded to junk status, currency continues to erode and ABI's business in the country is weakening.
U.S. profits declined by 6.7% in the first half with business eroding, on sales–to–retail (STR) basis. Bringing shipments in–line with depletions will not provide same bump as previously expected.
Here are some of the key factors:
- The United States accounts for approximately 34% of ABI's EBITDA
- The company's U.S. high–end business is eroding more rapidly than anticipated
- The decline of the Bud Light Ritas line of flavored malt beverages (FMBs) is accelerating
- New FMBs Oculto and Mix Tail have failed to get traction
- ABI is having problems attracting talent to its high–end business
- Its distributor relations are eroding rapidly once again
- Overall business declines are accelerating.
Moreover, the company's Mexican business slowing:
- Mexico accounts for 12% of EBITDA
- EBITDA declined by 7.1% in the first half due to currency translation
- Nearly $700 million in synergies have already captured
- Another $300 million are anticipated but will not be enough to offset other market issues
- Volume growth and pricing gains are slowing in Mexico
- Although business organically remains positive, the majority of incremental profit gains have been achieved.
With ABI's competitive position eroding in its two largest markets and organic growth in Mexico slowing, more than 70% of EBITDA contribution will remain a drag over the next one to two years. This will result in continued pressure on the stock.
Analysts have started to notice the eroding business performance and have begun to downgrade the stock.
ABI's positioning of the company to focus on organic growth has gained no traction with decelerating businesses in every region of the world with the exception of China, which remains a small contributor to overall performance.
The company remains controlled by families that are focused on wealth creation versus long–term growth. With businesses weakening everywhere and no sight as to when currency headwinds will end, pressure has been built to turn around performance. Due to the company's scale, few options exist in beverages. Coke is too big at moment and Diageo will take longer to realize value. Consequently, the only viable option in the next two to three years to move the nettle is SABMiller. As a result, ABI has decided to move forward to pursue SABMiller.
Why approach board versus management?
It is no secret that SABMiller's senior management is not warm toward ABI. Further, ABI has shown little respect for SABMiller's senior management team. As a result, approaching the senior management team would likely result in just delaying any potential deal for the company.
The board has a legal obligation to negotiate in good faith and maximize value for the company. As a result, approaching the board was the only realistic approach to making progress and potentially completing a transaction.
This approach is not dissimilar to the one InBev used to purchase Anheuser–Busch, with the exception that management was approached first. They rejected Inbev's advances and the company brought the offer to shareholders, thereby forcing the board to review the offer objectively. If agreement is not reached with board, expect ABI to bring the deal to shareholders, assuming potential hurdles are addressed satisfactorily.
Value drivers in buying SABMiller
Many of the value drivers in this potential deal are similar to past acquisitions. They include:
- Cost synergies through the elimination of current senior management, procurement scale, and the leveraging of pricing and performance for profit versus volume/profit balance
- Access to high margin markets, including some with monopolistic positions, such as the Andean region in Latin America
- Access to fast growing regions, such as Africa
- The ability to strip businesses to drive profit growth disregarding volume implications in markets such as Australia
- A platform for bringing global brands to markets not currently available in order to drive margin growth
Hurdles/Risks
Several hurdles and risks to value required to purchase SABMiller exist. Some have likely been addressed while others are uncertain. Key issues include:
- The question of whether the largest shareholders will support the deal — Altria has likely committed to not block an offer for SABMiller
- The Coca–Cola joint venture in Africa — Likely change of control provision exists. Coca–Cola not friendly with ABI; however, ABI could offer a stand–still agreement for a period of time as compensation. It remains to be seen how this plays out.
- Whether fair value will be received for MillerCoors equity — due to anti–trust
- Whether fair value will be received for China Resources Snow (CRV) equity
- Potential anti–trust issues around equity stake in Efes relative to Russia and Ukraine
- Small risk in the United Kingdom of anti–trust actions.
Other operating risks include:
- ABI senior management's talent depth for key markets
- The long–term sustainability of growth after ABI absorbs SABMiller and realizes synergies
- ABI's lack of a track record of overall growth, especially in low–EBITDA–margin and developed markets (despite strong profit growth experienced in quasi monopolistic markets).
Likely Outcome
Assuming the Santa Domingo family is onboard, it will be very difficult for SABMiller management and board to prevent ABI from getting support from majority of shareholders. It is likely that, if the economics work for ABI on the purchase price, the company will succeed in purchasing SABMiller.
In short–term, this will likely drive profit and value creation for ABI. Over the longer term, however, sustained profit and value creation are uncertain, given past results from large transactions, including the combination of InBev and Anhueser–Busch. Further, the impact on global beer business and its competitive position versus spirits and wine will likely be erosion.