If AB InBev (NYSE: BUD.US) makes an offer for SABMiller (LSE: SAB), a low-ball bid is very likely, in my view. And if AB InBev is willing to pay top dollar, it may also find it difficult to convince SAB shareholders to jump ship.
Is value up for grabs right now? Is this enough to get rid of SAB stock? There are few other things you should consider.
Takeover Premium = Zero?
As you may know, SAB stock already prices in a significant M&A premium. Its unaffected share price isn’t easy to estimate, but should be in the region of £31.10, or about 15% below SAB’s current stock price, and 17% below its closing price on Monday.
The implied enterprise value (EV) of SAB divided by its forward earnings before interest, taxes, depreciation and amortisation (EBITDA) stands at about 14x and 13x for 2015 and 2016, respectively. This assumes a normalised EBITDA growth of 8% annually into 2016, which is a base-case scenario.
If EBITDA grows at a faster clip — say at about 15% annually — those trading multiples will drop to 13.3x and 11.6x in 2015 and 2016, respectively. Under a worst-case scenario, with EBITDA growth at 4% annually, SAB’s EV/EBITDA multiple goes up to 14.7x and 14.2 in the next could of years.
Now, based on historical take-out multiples for M&A in the beer space, a properly priced acquisition of SAB should be executed at no premium to SAB’s current stock price — whether the acquirer assumes that SAB will manage to beat growth estimates or not.
It’s hard to envisage why AB Inbev — whose management team have a strong track record in M&A and are known for their powerful negotiating skills — should offer much more than SAB’s current enterprise value to clinch a deal.
The takeover of Mexico’s Modelo was a particularly difficult deal to pull off a couple of years ago, but back then AB InBev management proved they were willing to wait for the right moment to acquire the half of the Mexican brewer they didn’t own.
So, What’s Next?
SAB is a truly unique beast in the industry for its emerging market exposure, so it may be able to fetch a multiple higher than 14x EBITDA if AB InBev makes a firm offer. Investors are taking profits on Tuesday, though.
Questions remain not only with regard to the size of the possible offer, but also with regard to the structure of the deal, i.e. the financing mix, which will determine how much AB InBev is willing to pay. I think that the interests of SAB shareholders would be preserved if AB InBev were willing to offer a mix of cash and stock to secure an acquisition that may cost in the region of $110bn, including net debt.
Based on its relative valuation, AB InBev stock trades at a 30% discount to SAB stock, which means that negotiations would probably favour SAB shareholders if the deal was financed by a large stock component. In this scenario, SAB will likely receive a low-ball bid. SAB has no intention to become part of a larger company, but in this scenario it may retain up to 25% of the combined entity. That’s not bad.
The real problem here is that AB InBev has de-levered its balance sheet and sold assets over the years, and its stock trades at a discount to SAB, so AB InBev must strike an all-cash deal that will unlikely entice SAB shareholders — although an all-cash deal would likely value SAB at a higher take-out multiple.
Either way, downside is apparent for investors betting that SAB will be taken over — as well as for those who wish that SAB would remain independent.
