SABMiller Action Drives Altria To One Year High
Altria Group (NYSE: MO) stock hit a 52 week high of $44.50 on Monday morning following reports that AB Inbev may be looking to buy SAB Miller [1]. This resulted in SAB Millers stock price rising to a 52 week high of $61.96 following rumors relating to this consolidation in the industry and thus benefited Altria, which has an equity stake in SAB Miller. Trefis estimates the value of altria’s stake in SABMiller to be 19.2% of Altria’s market capitalization. [2] In this article we do a roundup of the M&A talk in the alcoholic beverages sector and how it impacts Altria Group.
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Beer Industry Consolidation Rumours
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The uptrend in SABMiller stock price has been attributed to a rumor that beer industry major AB Inbev (NYSE: BUD) may seek to buy it over. AB Inbev is supposed to be in talks with banks to line up financing for this deal. The deal is rumored to be valued at $122 billion. [3] This is expected to represent a buyout premium in the vicinity of 30% for each SABMiller share. [2]
The deal is important considering that AB Inbev’s share of the global beer market is approximately 20%, whereas SABMiller has a share of 9.6%. Acquiring SABMiller would ensure market leadership for AB Inbev in Colombia, Peru and many African and Asian countries. [3] These are places where Inbev’s signature brand, Budweiser, has limited market penetration. [4]
Such efforts at inorganic growth are not new to Inbev. It has historically sought to increase its market share through acquisitions. It was formed in 2004 by the merger of Brazil’s Ambev and Belgium’s Interbrew to create the largest brewer in the world. Four years later, Anheuser-Busch was bought out, leading to formation of Anheuser-Busch Inbev (AB Inbev). The fact that debt raised for these deals has been steadily repaid, is expected to leave this company in a position to pursue its inorganic growth opportunities currently. [3]
SABMiller Seeks To Buy Heineken
Meanwhile, SABMiller sought to take over the Dutch Brewer Heineken (AEX: HEIA). This offer was turned down as Heineken stated it that it wanted to preserve its independent identity and heritage. [3] This effort by SABMiller was seen in the light of its own efforts to ward off a hostile takeover by AB Inbev. Together, SABMiller and Heineken have market capitalization that sum to over €100 billion. SABMiller equity is worth $96.4 billion (~€74.4 billion) and Heieneken equity worth €34.56 billion in the market. AB Inbev market capitalization stands at €141.32 billion. [5] Financing the buyout of a merged entity worth €100 billion will be difficult even for AB Inbev.
Such a strategy of taking on debt to buy companies to ward off hostile takeovers is commonly referred to as a poison pill strategy. Companies other than Heineken that have been identified as potential partners for SABMiller in such a strategy are Carlsberg (CSE: CARLB) and Diageo (NYSE:DEO). Carlsberg is a Danish brewer worth ~$15 billion and Diageo is a $76 billion liquor company. Analysts have been quick to write off both these options. They say Carlsberg is too small and Diageo too successful for SABMiller to make a play for either. [6] This apparent failure of the poison pill strategy is expected to strengthen AB Indev’s pitch for a SABMiller buyout. [7]
An alternate motive for the acquisition could be the desire of SABMiller management to expand the domain of their influence. This motive is referred to as empire building. [8] The applicability of such a motive arises here because the combined SABMiller-Heineken entity would be the largest beer producer in the world. However, it would still trail Inbev in terms of profitability. This has led analysts to overrule empire building and endorse the poison pill as an explanation for this acquisition move. [9]
Where Does Altria Stand?
On account of its stake in SABMiller, valued at $26.2 billion, Altria earned dividends of $991 million in 2013. This represents an annual dividend payout of 3.78%. Even if we ignore the unrealized capital gains on this equity investment, this is a good return. We assume Altria would like this cash flow to continue into the future. Also, if this stake is acquired by AB Inbev, the taxes on this sale that Altria would have to pay is expected to be close to 40%. This will easily swallow up the estimated premium (~30%) that will be paid by Inbev. [2]
Taking stock of these two aspects, viz. continued dividends and tax implications, we expect Altria to oppose the sale of SABMiller to Inbev. With its status as the single largest shareholder of SABMiller and its directors on SABMiller’s boards, Altria is perfectly poised to defend its interests in this M&A showdown that has seen its share price soar.
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- Why Altria Group Stock Hit A One-Year High [↩]
- Altria Group Could Receive A Multi-Billion Dollar Payoff as SABMiller PLZ is in play once again [↩] [↩] [↩]
- AB Inbev Explore Financing To Buy Rival [↩] [↩] [↩] [↩]
- Heineken rebuffs SABMiller Deal [↩]
- Bloomberg Company Market Data For SABMiller, Heineken and Inbev [↩]
- Heineken As SABMiller Poison Pill [↩]
- AB Inbev Pursuit Of SAB Seen Benefitting From Heineken Rejection [↩]
- Motives For Acquisitions, NYU Stern [↩]
- SABMiller Leaps As Merger Talks Follow Heineken No [↩]