Anheuser-Busch InBev: What The SABMiller Acquisition Could Mean

Anheuser-Busch InBev (NYSE:BUD) has gone through a series of mergers and acquisitions in its history, deriving strong inorganic growth by expanding into newer markets and strengthening operations in existing business units. The combination of InBev and the American brewer Anheuser in 2008, and the acquisition of Grupo Modelo last year, further strengthened the company’s lead in the global beer market, accounting for nearly 20% of the worldwide beer volumes in 2013. ^[1] The beer industry has seen a lot of consolidation in recent times, as brewers look to gain from large-scale cost cuts, economies of scale and other synergies. Speculation that Anheuser-Busch InBev is lining up a bid to buy chief rival and the second highest-selling brewer in the world, SABMiller, provided boosts to both stocks this week, with the SABMiller stock rising by nearly 10% just after the rumors surfaced.

Anheuser’s buyout of SABMiller has been in speculation for years, but couldn’t be realized due to the large amounts of debt taken on by the former to finance its multiple mergers and acquisitions in the last five years. But with steadily increasing cash flow and large input cost reductions, Anheuser might now look to acquire SABMiller, and lock-in its share in some South American and African markets, where beer is expected to grow at a fast pace.

We have a $113 price estimate for Anheuser-Busch InBev, which is roughly in line with the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

According to the Wall Street Journal, AB InBev is in talks with banks to finance a possible $122 billion deal to acquire SABMiller. AB InBev is presently valued at around $182 billion, almost double the market capitalization of SABMiller. While this megadeal will stretch Anheuser’s finances, a possible collaboration between the two companies could give Anheuser control over almost one-third the global beer volumes.

AB InBev Might Have To Sell SABMiller’s U.S. And China Interests

SABMiller generated roughly $34 billion in revenues in its fiscal 2014 ended March. However, this figure includes share of associates’ and joint ventures’ revenues, including the MillerCoors joint venture in the U.S. with Molson Coors, and CR Snow in China with China Resources Enterprise. Antitrust issues might call for Anheuser to sell off SABMiller’s partnership deals in the U.S. and China, the two largest beer markets in the world. Another conflict could be SABMiller’s partnership with Coca-Cola in Latin America, as Anheuser also has bottling and distribution deals with PepsiCo in this region. SABMiller’s revenues in fiscal 2014 excluding revenues from joint ventures and subsidiaries amounted to $22 billion, which gives a rough estimate of annual sales that could be added to AB InBev’s top line, following the acquisition. This merger could boost Anheuser’s top line by a massive 50%.

Opportunity To Enter Africa For AB InBev

The combination with SABMiller will primarily be of importance to AB InBev because of the former’s stronghold in high growth markets of Africa and South America. While Anheuser-Busch InBev has no meaningful presence in Africa, SABMiller dominates the beer industry in that region, with over 30% of its revenues coming from South Africa and the rest of the continent in the last fiscal year. SABMiller’s brewing and beverage operations in Africa are spread over 15 countries, with a further 21 covered through its associate interests in the Castel Group’s African beverage businesses and an associated undertaking in Zimbabwe. Lager only volumes amounted to nearly 47 million hectoliters for SABMiller in Africa last fiscal year, and with the possible acquisition, AB InBev could improve its annual volume sales (around 426 million hectoliters) inorganically.

Latin America Beer Unit Could Get A Further Boost

While the combination with SABMiller could mean expansion for Anheuser in Africa, an uncharted region for the company as of now, the latter’s Latin America beer sales could further strengthen. AB InBev already dominates most of the largest beer markets in South America, such as Brazil, Mexico and Argentina, accounting for more than half the beer volumes in these countries. SABMiller’s acquisition will improve the company’s presence in countries such as Colombia and Peru, and owing to the British brewer’s premium brand positioning with brands such as Miller Light, revenues per unit volume could also rise. In fact, according to our estimates, SABMiller’s revenue per unit volume in Latin America is around 33% more than that of AB InBev’s in the region. As disposable incomes increase in Latin America, consumption of premium beer, which presently has low current penetration levels, is expected to improve. With the inclusion of SABMiller’s beer volumes in Latin America, which stood at nearly 44 million hectoliters in its last fiscal year, AB InBev’s volumes in the region could rise by over 30%. The combination will not only provide incremental volumes, but also boost AB InBev’s prospects of growth in the fast growing premium beer segment in Latin America.

• Latin America Is The Most Profitable AB InBev Unit

Latin America is also a crucial region for AB InBev as it is the most profitable. Almost 40% of the brewer’s beer production capacity is concentrated in Latin America, allowing the brewer to enjoy low labor and raw material costs, and economies of scale in the region. As Latin America is also a high volume market for the company, producing beer near the end market also reduces additional costs of transportation and distribution. Anheuser-Busch InBev already boasts high industry-leading operating margins, with the figure at 46.7% through the last four quarters. In contrast, rivals Molson Coors and Heineken posted margins of 16.6% and 8.3% respectively during this period. ^[2] South America and Mexico are the most profitable units for Anheuser, with adjusted EBITDA margins of around 52% and 46.5% respectively last year, while the company’s overall EBITDA margins stood at about 40%.

• SABMiller Could Further Bolster Operating Margins

What the SABMiller acquisition could do is further widen margins for AB InBev. This is because of the premium brand positioning of SABMiller, which could boost profitability as these brands have fatter margins. In addition, AB InBev will cut down additional manufacturing costs and other unnecessary input costs, and derive significant synergy benefits in Latin America. A reference for the expected synergy benefits could be AB InBev’s combination with the Mexican brewer Grupo Modelo last year. Anheuser remains committed to its aim of delivering cost synergies of at least $1 billion by the end of 2016, with the majority of that by the end of next year. With AB InBev, Grupo Modelo and possibly SABMiller working under one name, the group will benefit from a strong integrated model and economies of scale.

While SABMiller’s operating margins stood at only 19% in its last fiscal year, compared to around 33% for AB InBev by our estimates, the combination might not hurt the latter’s profitability. Concentration of scale in key markets and removal of duplicate costs, following the acquisition, will further reduce manufacturing complexity and lower average production cost. The group could also draw higher profits on each incremental sale by leveraging its high-fixed-cost base, particularly in the low-cost countries in Latin America.

Anheuser’s acquisition of SABMiller will be a significant boost to the company’s beverage business, but it will also subsequently dent the company’s finances. Even after the sale of SABMiller’s interest in MillerCoors, AB InBev’s net debt to EBITDA ratio could rise to about 6.5, in order to finance the combination. Anheuser has been looking to lower its debt to EBITDA ratio, which rose to 2.49 after the acquisition of Oriental Brewery this year, from 2.26 at the end of 2013. ^[3] Other than the financial issues, this deal might not work out as SABMiller looks to make M&A bids of its own. The British brewer is looking to acquire the third largest brewer in the world, Heineken. Although Heineken rejected SABMiller’s initial bid, the latter might make another bid or look to acquire other smaller brewers such as Diageo, which would then hamper AB InBev’s acquisition prospects.

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1. Beer giant AB Inbev explores financing to buy rival SABMiller, wsj.com [↩]
2. Why Anheuser-Busch InBev is poised to continue strong growth, forbes.com [↩]
3. Heineken’s snub to SAB revives beer deal speculation, reuters.com [↩]