Anheuser-Busch InBev may struggle to go another round with SABMiller. Cost savings in previous brewery mergers suggest there aren't enough in this one to cover the premium included in the takeover bid that now tops $100 billion. Sweetening the offer will be a tall order.
Deals typically make financial sense for an acquiring company's owners if the value gained from combining the businesses is greater than the premium being paid over the target's undisturbed share price. AB InBev's offer, which comes with both a cash option and a lower-priced cash-and-stock alternative, clocks in at a 37 per cent premium to where SABMiller shares were trading on September 14, before talk of the approach surfaced. That adds up to £17.6 billion or $27 billion.
Using that figure, it's possible to back out the pre-tax synergies needed to create that amount of new value. According to Breakingviews calculations, it would take about $3.5 billion of annual savings, after blending the tax rates of the two companies. That's about 13 per cent of SABMiller's expected total sales for the fiscal year ending in March 2016.
But there's a snag. Around $10 billion of SAB's sales come from associates - ventures over which it has no formal control. Budweiser may be able to push for cost savings in those associates, but it is far from assured. So it's prudent to assume that the synergies will come out of sales controlled by SAB. That suggests the Budweiser brewer is banking on getting cost savings of 23 per cent of sales.
For a beer deal, that's big. Only AB InBev's 2013 acquisition of Modelo, with an announced synergy target of about 20 per cent of the target's sales, came anywhere close, according to a list of relevant combinations compiled by Bernstein. A better proxy might be the very deal that created AB InBev in 2008. In that transaction, the touted savings were closer to 13 per cent of InBev's revenue, although the final figure ended up somewhat higher. But as things stand, AB InBev might find itself paying away the whole value of those synergies to SABMiller's shareholders.
AB InBev boss Carlos Brito may see additional financial promise coming from owning SAB. His quarry's footprint in Africa, the world's fastest-growing beer market, might give AB InBev a path to increasing sales. But all told, AB InBev shareholders need a thick pair of beer goggles to make a higher bid look appealing.
Deals typically make financial sense for an acquiring company's owners if the value gained from combining the businesses is greater than the premium being paid over the target's undisturbed share price. AB InBev's offer, which comes with both a cash option and a lower-priced cash-and-stock alternative, clocks in at a 37 per cent premium to where SABMiller shares were trading on September 14, before talk of the approach surfaced. That adds up to £17.6 billion or $27 billion.
Using that figure, it's possible to back out the pre-tax synergies needed to create that amount of new value. According to Breakingviews calculations, it would take about $3.5 billion of annual savings, after blending the tax rates of the two companies. That's about 13 per cent of SABMiller's expected total sales for the fiscal year ending in March 2016.
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For a beer deal, that's big. Only AB InBev's 2013 acquisition of Modelo, with an announced synergy target of about 20 per cent of the target's sales, came anywhere close, according to a list of relevant combinations compiled by Bernstein. A better proxy might be the very deal that created AB InBev in 2008. In that transaction, the touted savings were closer to 13 per cent of InBev's revenue, although the final figure ended up somewhat higher. But as things stand, AB InBev might find itself paying away the whole value of those synergies to SABMiller's shareholders.
AB InBev boss Carlos Brito may see additional financial promise coming from owning SAB. His quarry's footprint in Africa, the world's fastest-growing beer market, might give AB InBev a path to increasing sales. But all told, AB InBev shareholders need a thick pair of beer goggles to make a higher bid look appealing.