E-Malt.com News article: World: AB InBev acquisition of SABMiller unlikely – Bernstein Research

There has been much discussion in recent weeks and months of the potential acquisition of SABMiller by AB InBev. .... We think it unlikely, Trevor Stirling of Bernstein Research wrote in a recent note, countering the thesis first put forth by Jim Koch and Credit Suisse.

Mr. Stirling writes that the combination "does have some strategic attractions and may possibly have been discussed by the two companies at some point." But while the two companies have very little overlap (except in the US) which makes for minimal "regulatory land-mines", this fact also "reduces the opportunity for classic synergies such as closing redundant breweries, merging distribution networks, etc."

Also, there would be a clash of cultures. "We view SABMiller as having a very strong track record of creating organic growth, primarily in an emerging market context, both from growing the beer category but also slowly but steadily increasing their share of the beer category. On the other hand, AB nBev have an incredible track record of improving profitability at acquired organizations..." So could they combine the two? Maybe. "However, we view a mega clash of cultures as much more likely," Mr. Stirling stated.

Additionally, he wrote that some of the "suggested drivers" of a mega-merger "at best red herrings and at worst downright misleading." Which drivers? Mr. Stirling says while the US beer business has some weaknesses, it's "not in a death spiral; it's not the fault of the new management teams, in our view." And besides, MillerCoors would have to be jettisoned anyway if AB InBev buys SABMiller.

What about the three-tier system? He says that the notion that a merger would be a "precursor to a manufacturer-led rollup/consolidation/margin squeeze on the 2nd tier of US beer distribution" is actually a "mythical bogey man which is regularly used to scare beer distributors and create column inches." In fact, Mr. Stirling believes that - in the near term at least - the vertical integration between brewers and distributors is "neither feasible nor desirable."

But bottom line, Mr. Stirling says that "there are many significant risks and financial challenges, such that we believe it unlikely that such a deal will ultimately be consummated."

For one, ABISABMILLER would have to "take a haircut" if selling their stake in MillerCoors to Molson Coors, since the latter would have all the leverage as the only viable buyer. They would also take a haircut in selling CR Snow in China for similar reasons.

So in summary, "this deal is much harder to pull off than BUD because (i) SAB offers lower synergies, (ii) SAB's emerging market cash flow makes it harder to lever, (iii) SAB is on a slightly higher multiple than BUD and (iv) the execution risks are much higher."


04 March, 2011