Will AB InBev and SABMiller Join Forces and Cheers to ‘MegaBrew’?

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What do you do when you’re the world’s biggest brewer and your growth prospects start to dry up? You swallow your $79 billion rival, of course. At least, that’s what Anheuser-Busch In Bev NV’s (NYSE:BUD) plan may be, according to Bloomberg, which reported Monday that AB InBev executives are now facing the possibility of a slowing growth forecast for the next decade. Though the company’s investment of more than $91 billion in acquisitions has helped it realize significant growth in the past 10 years, analysts are now recognizing the reality that AB InBev’s takeover possibilities are finally becoming few and far between.

Enter SABMiller Plc, AB InBev’s $79 billion rival and the world’s second biggest brewer. While AB InBev’s growth is slowing, SABMiller’s is speeding up, thanks to its presence in fast-expanding regions like Africa. AB InBev might now be interested in weighing the opportunity of a tie-up as long as regulators allow it. According to Bloomberg, SABMiller CEO Alan Clark said in January that a case could be made for a tie-up but that it would require the two respective companies to divest some U.S. operations to appease regulators.

Although representatives for AB InBev have declined to speak to Bloomberg about any SABMiller deal prospects, analysts continue to maintain that it is “such an obvious next.” That’s what Matthew Beesley, head of global equities at Henderson Global Investors, said to the news service, and analysts at Sanford C. Bernstein & Co. agree. Per Bloomberg, they estimate that the AB InBev-SABMiller combination “MegaBrew” would have almost half the global beer profit pool, subsequently increasing AB InBev’s earnings immediately, as long as it pays a 30 percent premium for SABMiller in cash.

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The problem is that AB InBev and SABMiller, the No. 1 and No. 2 brewers, respectively, would still have to get their deal past regulators if they agreed on a tie-up. That would require a divestment of U.S. operations, something AB InBev might not be willing to do.

Though AB InBev has been combatting slowing sales of mainstream brands in the U.S. thanks to consumers’ increasing preference for craft beer, spirits, and wine, the Leuven, Belgium-based country still saw significant growth in the country thanks to a number of high-profile acquisitions, and it might not be willing to make a divestment compromise just yet. Reuters reports that InBev bought Anheuser-Busch Cos. in 2008 for about $1 billion, while SABMiller was busy orchestrating smaller acquisitions that eventually added up to the takeover of around 50 companies.

AB In-Bev, the beer giant with brands that include Budweiser, Corona, and Stella Artois, reported its latest earnings earlier in February and subsequently enjoyed a stock surge that rose to above $167 billion in intraday trading that day. AB InBev’s $167 billion ceiling topped beverage king Coca-Cola’s (NYSE:KO) by a few hundred million dollars at one point on the day of its earnings release; AB InBev thus temporarily usurped the soda giant from the beverage throne.

Although AB InBev’s annual sales growth rate in the past 10 years has hit about 18 percent, analysts estimate that that will slow to about 4 percent over the next 10 years. Bloomberg reports that an acquisition of SABMiller would give AB InBev more than $7 billion of revenue in developing markets like Africa and Asia, reducing AB InBev’s dependences on the Americas and Brazil, and a deal could also secure the company’s presence in countries such as Colombia, Ecuador, and Peru.

Bryan Keane, a money manager at Alpine Woods, explained to Bloomberg: “SAB has a lot of emerging-market assets, and in particular, in areas where AB InBev doesn’t necessarily have too much influence. Right now, AB InBev does not have a lot of business in Africa and SAB is a large player there. That’s one of the areas where beer consumption is growing, and it would allow AB InBev to further diversify the business.”

Now it’s up to AB InBev to weigh its options. Analysts report that the two companies could likely get a tie-up to work because AB InBev and SAMiller operate in largely separate markets, but antitrust authorities would still likely require SABMiller to sell its stake in MillerCoors and possibly its stake in a Chinese joint venture, making the tie-up prospect an “incredible undertaking,” according to what Jonathan Frye, an analyst at Mirabaud in London, told Bloomberg.

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