AB InBev SABMiller, Anheuser-Busch InBev <ABI.BR> has approached rival SABMiller <SAB.L> about a takeover that would form a brewing colossus producing a third of the world's beer.
A merged group would have a market value of around $275 billion at current prices, and would combine AB InBev's dominance of Latin America with SABMiller's dominance in Africa, both fast-growing markets, as well as their breweries in Asia.
"The real attraction is Africa, where AB InBev has no presence, as well as some add-ons in Asia and Latin America," said Societe Generale analyst Andrew Holland.
SABMiller, the world number two and maker of Peroni, Grolsch and Pilsner Urquell, said on Wednesday it had been informed that AB InBev intended to make an offer and that under British rules, it would have to do so by October 14, though it cautioned that no offer has yet been made.
AB InBev, the global leader and maker of Budweiser, Stella Artois and Corona, confirmed its approach to SABMiller's board.
A source close to SAB said it was too early to say what SAB would do, since no offer has been made.
"At this stage, we’re in wait and see mode," said the source.
Speculation about a merger has swirled for years. The timing of the approach, after more than a decade of acquisitions by AB InBev, follows a roughly 15 percent drop in SABMiller's share price from early August to mid-September.
"It's exactly the moment they've been waiting for," said Morningstar analyst Phil Gorham. "It makes sense financially for the first time in years."
AB InBev will have to pay at least 40 pounds ($62) per SAB Miller share, and maybe as much as 45 pounds, according to analysts - implying an overall price of up to $130 billion, including SABMiller's debt.
That would make it one of the largest takeovers in history.
Shares in SAB closed up 19.9 percent at 36.14 pounds. AB InBev's were up 6.4 percent. Rivals Heineken <HEIN.AS>, Carlsberg <CARLb.CO> and Diageo <DGE.L> also rose on speculation SAB might seek another merger as a defense strategy, as it did last year when it offered to buy Heineken, but was rebuffed.
Since then it has combined its African soft drink bottling business with that of Coca-Cola <KO.N> and in recent weeks there has been speculation about it combining with Diageo or Australian drinks firm Coca-Cola Amatil <CCL.AX>.
The global beer market is dominated by a handful of brewers increasingly moving into new markets as they look to shrug off weakness in North America and Europe where consumers increasingly choose craft beers made by independent players or wine or spirits.
AB InBev's global beer market share was 21.1 percent in 2014 and SABMiller's 15 percent, according to industry experts Plato Logic. Heineken is the No. 3.
ROOM FOR FUNDING
AB InBev's target for its net debt to core profit (EBITDA) ratio is 2 times, from around 2.5 currently. It is likely to reach that by 2016, the earliest any deal could realistically be completed, and so has room to borrow to fund any takeover.
When it bought Budweiser-maker Anheuser-Busch in 2008 for $52 billion, the largest cash takeover in history at the time, it let the ratio rise to beyond 5 times. Going that high again might allow it to raise as much as $100 billion in debt.
AB InBev's controlling families own just over half of the company, while SABMiller's two top shareholders are cigarette maker Altria <MO.N> and the Santo Domingo family of Colombia.
Neither could immediately be reached for comment, but analysts say both are expected to want at least some payment in shares rather than cash, due to potential tax liabilities.
Neil Dwane, European chief investment officer, equity, at Allianz Global Investors, which holds shares in both companies, said AB InBev had faced increasing pressure to return excess cash to shareholders.
"ABI is paying a high price but accretion to earnings from low debt costs would be something in the region of 15 percent. However, we think the return on this deal could be a relatively disappointing 8 percent after 10 years," Dwane said.
AB InBev is known for aggressive cost-cutting to raise margins and for growing beers like Budweiser globally.
Yet there are significant antitrust hurdles to any combination, particularly in the United States, where AB InBev has almost half the market and SABMiller's joint venture with Molson Coors <TAP.N>, MillerCoors, has just under 30 percent.
"The costs that could be saved in the distribution operations are high - and the antitrust hurdles are higher," said Erik Gordon, professor at the University of Michigan's Ross School of Business.
Molson Coors may benefit as the only realistic buyer if SABMiller has to divest its stake in the venture.
Any merged group may also have to sell interests in China, where SABMiller's CR Snow joint venture with China Resources <0291.HK> is the market leader. Heineken, Carlsberg or China's Tsingtao could be potential buyers.
Plato estimates that after disposals, the combined group could end up with a 28 percent global market share.
AB InBev is being advised by Lazard while SABMiller is being advised by Robey Warshaw, JP Morgan and Morgan Stanley.
A merged group would have a market value of around $275 billion at current prices, and would combine AB InBev's dominance of Latin America with SABMiller's dominance in Africa, both fast-growing markets, as well as their breweries in Asia.
"The real attraction is Africa, where AB InBev has no presence, as well as some add-ons in Asia and Latin America," said Societe Generale analyst Andrew Holland.
SABMiller, the world number two and maker of Peroni, Grolsch and Pilsner Urquell, said on Wednesday it had been informed that AB InBev intended to make an offer and that under British rules, it would have to do so by October 14, though it cautioned that no offer has yet been made.
AB InBev, the global leader and maker of Budweiser, Stella Artois and Corona, confirmed its approach to SABMiller's board.
A source close to SAB said it was too early to say what SAB would do, since no offer has been made.
"At this stage, we’re in wait and see mode," said the source.
Speculation about a merger has swirled for years. The timing of the approach, after more than a decade of acquisitions by AB InBev, follows a roughly 15 percent drop in SABMiller's share price from early August to mid-September.
"It's exactly the moment they've been waiting for," said Morningstar analyst Phil Gorham. "It makes sense financially for the first time in years."
AB InBev will have to pay at least 40 pounds ($62) per SAB Miller share, and maybe as much as 45 pounds, according to analysts - implying an overall price of up to $130 billion, including SABMiller's debt.
That would make it one of the largest takeovers in history.
Shares in SAB closed up 19.9 percent at 36.14 pounds. AB InBev's were up 6.4 percent. Rivals Heineken <HEIN.AS>, Carlsberg <CARLb.CO> and Diageo <DGE.L> also rose on speculation SAB might seek another merger as a defense strategy, as it did last year when it offered to buy Heineken, but was rebuffed.
Since then it has combined its African soft drink bottling business with that of Coca-Cola <KO.N> and in recent weeks there has been speculation about it combining with Diageo or Australian drinks firm Coca-Cola Amatil <CCL.AX>.
The global beer market is dominated by a handful of brewers increasingly moving into new markets as they look to shrug off weakness in North America and Europe where consumers increasingly choose craft beers made by independent players or wine or spirits.
AB InBev's global beer market share was 21.1 percent in 2014 and SABMiller's 15 percent, according to industry experts Plato Logic. Heineken is the No. 3.
ROOM FOR FUNDING
AB InBev's target for its net debt to core profit (EBITDA) ratio is 2 times, from around 2.5 currently. It is likely to reach that by 2016, the earliest any deal could realistically be completed, and so has room to borrow to fund any takeover.
When it bought Budweiser-maker Anheuser-Busch in 2008 for $52 billion, the largest cash takeover in history at the time, it let the ratio rise to beyond 5 times. Going that high again might allow it to raise as much as $100 billion in debt.
AB InBev's controlling families own just over half of the company, while SABMiller's two top shareholders are cigarette maker Altria <MO.N> and the Santo Domingo family of Colombia.
Neither could immediately be reached for comment, but analysts say both are expected to want at least some payment in shares rather than cash, due to potential tax liabilities.
Neil Dwane, European chief investment officer, equity, at Allianz Global Investors, which holds shares in both companies, said AB InBev had faced increasing pressure to return excess cash to shareholders.
"ABI is paying a high price but accretion to earnings from low debt costs would be something in the region of 15 percent. However, we think the return on this deal could be a relatively disappointing 8 percent after 10 years," Dwane said.
AB InBev is known for aggressive cost-cutting to raise margins and for growing beers like Budweiser globally.
Yet there are significant antitrust hurdles to any combination, particularly in the United States, where AB InBev has almost half the market and SABMiller's joint venture with Molson Coors <TAP.N>, MillerCoors, has just under 30 percent.
"The costs that could be saved in the distribution operations are high - and the antitrust hurdles are higher," said Erik Gordon, professor at the University of Michigan's Ross School of Business.
Molson Coors may benefit as the only realistic buyer if SABMiller has to divest its stake in the venture.
Any merged group may also have to sell interests in China, where SABMiller's CR Snow joint venture with China Resources <0291.HK> is the market leader. Heineken, Carlsberg or China's Tsingtao could be potential buyers.
Plato estimates that after disposals, the combined group could end up with a 28 percent global market share.
AB InBev is being advised by Lazard while SABMiller is being advised by Robey Warshaw, JP Morgan and Morgan Stanley.
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