Altria: Potential SABMiller Takeover Could Mean Time To Cheer

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Altria Group

While most know Altria (NYSE:MO) for its major presence in the market for smokable and smokeless products, little is spoken of other ventures that it is associated with. One of this is the tobacco house’s approximate 27% stake in SABMiller, a multinational brewing company, which allows the company a slice of the approximate $36 billion worth of profits in the beer segment. Between Tuesday and Wednesday, Altria’s stock price has climbed almost 6% with talks surfacing of a possible take over of SABMiller by beer conglomerate, Anheuser-Busch InBev (NYSE:BUD). Here is how a potential AB InBev take over of SABMiller could be beneficial for Altria.

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Source: NASDAQ

 

In spite of Altria’s achievements in the tobacco space, the industry is usually troubled, right from volume declines to constant regulatory battles. At this time, SABMiller could be a source of reprieve for the company and has historically proven to be just that. Altria’s stake in SABMiller has actually been one of the fastest growing segments of the business, with earnings from the holding increasing from $600 million in 2009 to more than $1 billion in 2014 (CAGR of ~11%). This is in sharp contrast to the Altria’s revenues from smokable and smokeless products, which have increased by about 4% on the whole between 2009 and 2014.

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Now, given this, imagine if the AB InBev take over actualizes. Clearly, this take over would be a huge one in the beer space considering AB InBev and SABMiller take the No.1 and No.2 spots in the global beer market, respectively. The deal will give AB InBev a stronger hold over coveted markets across Africa and South America where SABMiller has a strong presence. While AB InBev has no meaningful presence in Africa, SABMiller champions the beer market in this region, with a footprint ranging across 15 countries and another 21 with associated interests in Castel Group. On the other hand, in South America, while AB InBev dominates markets across Brazil and Argentina, with markets shares of 68% and 78%, respectively, SABMiller has a strong presence in markets such as Colombia, Peru, Panama, Ecuador, Honduras, and El Salvador. Clearly, this acquisition is going to significantly expand the post-merger entity’s footprint across the continent. On the other hand, SABMiller is bound to benefit from AB InBev’s top position across big markets such as the U.S., Canada, and Mexico. Apart from this, the acquisition is bound to result in massive efficiency gains in terms of reducing the costs associated with production, distribution, and marketing.

SABMiller - Major markets and position

SABMiller – Major Markets and Position

ambev

Anheuser-Busch InBev – Major Markets and Position

 

Let’s consider how this move could benefit Altria? Altria presently holds a 27% economic interest in SABMiller, which resulted in a little over a billion dollars in revenues for Altria in fiscal 2014.  Now, this stake amounts to approximately 19-20% of Altria’s market cap, which currently stands at about $106 billion. Although SABMiller has been seeing more difficult times recently against economic turmoil across Europe, changing tastes, and preferences in the U.S., and currency headwinds in light of a strong dollar, the company does hold immense potential primarily because of the nature of the product that it sells, and the degree of geographical diversification in its operations. In this case, if AB InBev does pick up the company, which could lead to tremendous cost savings, efficiency gains, and exposure to other markets, SABMiller could very well fetch itself a premium as the two entities plug into each others drawbacks. This could  translate into a significant increase in earnings for Altria.

Now, for a long time, investor sentiments regarding Altria’s stake in SABMiller have been at loggerheads. While there are one set of people who believe that the diversification from tobacco into beer is a good move, there are others who believe that Altria should focus on enhancing its core business rather than delve into the beer space. If Altria does go with proponents of sticking to the tobacco-dominated business, the take over could be Altria’s best chance at selling off the stake to maximize profits. On the other hand, if they see more potential in the business now that SABMiller falls under the umbrella of the world leader in beer, Altria could resort to a stock-based take over to continue reaping benefits from the deal going forward.

While this potential deal seems to be anything but bad news for all parties involved, as witnessed by the rally in stock prices for Ab InBev, SABMiller, and Altria, there could be a number of obstacles that stand in the way of an acquisition. Top on this list are relevant anti-trust issues, which are bound to exist when the world leader in beer, and the next in line, decide to join forces. For one, with market share such as 45% for AB InBev and 25% for SABMiller in key markets such as the U.S., the acquisition could involve regulatory intervention leading to divestitures of key brands that may impact the overall attractiveness of the deal.  In spite of these, there is no doubt that SABMiller and consequently Altria, could see an upswing in light of the deal.  But only time will tell whether this day will actually come, since this is not the first time that news of an AB InBev takeover of SABMiller has surfaced.

We have a $56 price estimate for the Altria Group, which is almost in line with the current market price.

See Our Complete Analysis For Altria

We have a $120 price estimate for Anheuser-Busch InBev, which is above the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

Sources:

  1. Altria – Financial Strength
  2. SABMiller – Annual Report 2015
  3. Anheuser-Busch InBev – Annual Report 2014
  4. Altria Group – Form 10-K, SEC
  5. SABMiller Gets Takeover Approach From Anheuser-Busch InBev

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