On October 12th 2015, AB Inbev has agreed to purchase SABMiller for about £68bn ($104.2bn) to form the world’s largest brew maker so far with combined sales revenues of about $64bn.
Drivers of the Deal
SABMiller’s acquisition marks the most ambitious step yet for the world’s largest brewer since the merger of Anheuser-Busch and InBev in 2008. The deal will create an undisputed leader with a 30% global market share and a control of about half of the industry’s profits. The combined company will also dwarf other major players like Heineken (HEIN.AS) and Carlsberg (CARLb.CO) in terms of sales: $68bn AB InBev vs. $21bn Heineken and $14bn Carlsberg (based on 2014 figures).
Even though the combined entity will account for the global production of one out of every three bottles of beer, the regional strengths of the two separate companies are entirely different. AB InBev is particularly strong in both South and North America with 48% and 45% market share, respectively. SABMiller, on the other hand, accounts for 40% of beer sales in the Middle East and Africa, where AB InBev is virtually non-existent.
Gaining market share in Africa is AB InBev’s management answer to the problems the company is facing in the US. Sluggish consumer demand and high competition from smaller breweries tend to make it more difficult to let the top-line grow and maintain profit margins. Africa, on the other hand, is expected to see a sharp increase in the legal drinking age population and middle class that usually prefers branded lagers rather than illicit brews.
While no specific figures were disclosed, based on Exane BNP Paribas estimates the combined company will make nearly $25bn of EBITDA in 2016. Many analysts also point to consolidation as a significant driver of the deal where the synergies will come from cost savings and economies of scale. However, analysts of Morningstar claim that AB InBev has to extract close to $2bn in annual cost savings in order to create value from the deal. AB InBev, being one of the most profitable consumer staples companies in the world and having a successful track record of integrating its acquisitions and delivering synergies, may in all likelihood live up to the task.
Transaction Terms and Structure
After a near-month period of talks the world’s top brewers, Anheuser-Busch InBev (ABI.BR) and SABMiller (SAB.L) finally agreed to the fourth-largest takeover in corporate history and the biggest deal for the UK. The terms of the $100 billion-plus deal that would give birth to the brewer selling one in every third beer all around the globe were announced on October 13th.
During a meeting held on October 11th, AB Inbev agreed to a cash payment of £44 per share for the majority of the shares– a 50% premium with respect to SABMiller’s closing share price on September 14th (£29.34), the last business day prior to the potential beginning of negotiations. However, the agreement was finally reached after weeks spent haggling over price. SABMiller had previously rejected four potential offers at £38, £40, £42.15, and £43.50 per share as undervaluing the company, thus forcing AB Inbev to sweeten its offer before the first official deadline set by UK regulators at 5:00 pm on October 14th.
The deal also includes a partial share alternative at a lower per-share value for approximately 41% of SABMiller’s shares outstanding. SABMiller’s stockholders who choose this alternative will be entitled to receive a cash payment of £3.56 and 0.483969 restricted shares (unlisted stock issued to corporate associates) for each SABMiller share. Furthermore, AB Inbev agreed to offer a $3bn breakup fee should the deal break down to take into account heightened “execution risk”, a typical trait of all megadeals.
After the two companies reached this initial agreement, the UK Takeover Panel initially granted a two-week extension from the first October 14th deadline, then furthering the period until November 4th, 5:00 pm to make a formal takeover offer. Throughout this span of time, AB Inbev has performed due diligence review of SABMiller’s financial statements and has eventually decided not to modify any terms of the preliminary contract.
The deal has been devised to meet the needs of SABMiller’s two biggest shareholders, Altria Group Inc. and Colombia’s Santo Domingo family, which own, respectively, 27% and 14% of the total shares outstanding. They both played a key role in arranging the partial-share alternative.
Goldman Sachs, J.P. Morgan Cazenove, Morgan Stanley, and Robey Warshaw LLP act as joint financial advisers for SABMiller. On the other side, AB Inbev is advised by Barclays, BNP Paribas, Deutsche Bank, Lazard and Merrill Lynch.
Industry Overview
The megadeal is happening during hard times for the brewing industry, which is facing “its greatest challenge in 50 years”, wrote in June the consulting firm McKinsey. Sluggish consumer demand, high competition and distribution challenges are the major threats.
As far as revenues are concerned, volumes stagnated between 2007 and 2014 in the US, the biggest market, while in other strategic markets such as Germany, France and the UK they dropped by approximately 10%. At the same time, costs being equal, competition has lowered profits in the more lucrative premium and super premium segments.
Another factor is that big players are suffering competition from small makers of “craft beer”. Recent years have seen craft brewers leading product innovation and, while overall production in the US rose 0.5% in 2014, their sales surged by 18%, gaining a 11% share of the $100bn beer market. Furthermore, the increasingly important role played by retail stores along the value chain as distribution channels contributes to the contraction in profit margins. Not only supermarkets and retail chains deliver lower margin profits, but they are also more demanding on product deliveries. As a result, breweries working capital is expanding and companies need organizational changes in order to minimize costs.
On the other hand, since most of the companies have structures comparable to confederations of local businesses, missing a unitary matrix, they can achieve far greater economies of scale from operating efficiencies.
To contact the authors:
Costantino Brizzi costantino.brizzi@studbocconi.it
Fabrizio Colloca fabrizio.colloca@studbocconi.it
Michał Ozimski michal.ozimski@studbocconi.it
Bocconi Students M&A Circle 