Anheuser-Busch InBev: The SABMiller Takeover

by The Compound Investor

Yesterday finally marked the completion of the long-anticipated takeover of SABMiller by Anheuser-Busch InBev (BUD). At a value of around $105b, it immediately becomes the largest ever acquisition of a British-listed company. SABMiller shareholders had two choices up to this point. Firstly, they could go for the all-cash option of £45 per SABMiller share. Secondly, they could opt for a mixture of stock and cash. Under this second deal they receive 0.483969 restricted NewCo shares and £4.6588 in cash for each SABMiller share they owned.

Now, let’s say you were a former SABMiller shareholder with a long-term outlook. I’m guessing here, but the second offer seems the most attractive. Granted, you would be restricted from selling NewCo shares for five years. On the flip side, it also values the deal at £54 per share versus £45 for the all-cash offer. You still get £4.6588 per share in cash, while those NewCo shares will still churn out regular cash dividend payments. It strikes me as the sweeter deal, all things considered.

NewCo

Given it starts trading today, now seems like a good time to take a look at NewCo. The short version is that it is a monster. I mean, just look at some of the names it overtakes in terms of sales and earnings. Heck, its projected EBITDA generation puts it ahead of just about everything. At $24b, it will rake in the equivalent EBITDA of Coca-Cola and Unilever combined. The figure is 20% higher than that generated by Swiss food behemoth Nestlé. The company’s brands will be responsible for about one-third of all global beer consumption and nearly half of the entire industry’s profits.

(Source: AB InBev Corporate Presentation)

Now, the beer market is pretty much completely saturated. The only place you could really call growth in the beer world is Africa (where Anheuser-Busch InBev had little presence pre-merger). In general terms that means organic growth prospects are quite weak. It also means that the company is going to rely heavily on cost savings and synergies to make this deal work.

So far, the firm has announced around 5,000 job cuts – equivalent to around 3% of its total workforce. After a one-off charge of around $1b, management thinks it can realize about $1.4b in annual savings as a result of the merger. Certain analysts think that figure may stretch to as much as $3b. Either way, most of it will come from closing down and merging offices that overlap on a geographical basis, plus things like productivity gains and increased logistical efficiencies.

Finances

Taking the combined profits of the new company into account, plus some synergies, means you are looking at around $12b in annual net income. Quick math puts that at around $6.00 per share, giving us a forward PE ratio of 21. The current Anheuser-Busch InBev dividend clocks in at $3.95 per share, so the distribution looks fairly well covered at first glance.

The final point I’d make concerns NewCo’s balance sheet. In short, it is going to have a heck of a lot of debt on it (over $100b worth to be precise). At 4.5x projected EBITDA and a dividend payout ratio of 66%, there isn’t a lot of room for maneuver here. Either the dividend will get cut, thereby freeing up cash to strengthen the balance sheet and reduce annual interest charges, or the dividend growth outlook will be muted in the near future.

Either way, the stock doesn’t exactly scream value right now. I mean, you can currently buy Johnson & Johnson stock on a PE of 17 and with 2.75% dividend yield. It has better growth prospects and a much healthier balance sheet. But if we are talking about a long-term portfolio of the highest quality businesses out there, then Anheuser-Busch InBev stock definitely deserves a place. It is now the undisputed king of beer profits.

Note

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