Lever brothers

Bud can swallow SABMiller without busting a gut

Anheuser-Busch InBev should be able to swallow a deal with SABMiller without busting a gut. Even at a huge-sounding $110 billion, the Belgo-American brewer could take on its Anglo-South African rival by paying partly with equity and making disposals that ease the burden further.

Start with that theoretical headline value. AB InBev has so far only made an informal approach to SAB, but assume it must pay a 35 per cent premium to the target's share price on September 15, the day before the deal was mooted, to get a hearing. Add SAB's existing net debt of around $10 billion. The total enterprise value of around $110 billion would be roughly half of Budweiser brewer AB InBev's own.

The cash requirement will be cut if existing SAB shareholders choose to take stock. Altria and the Colombian Santo Domingo family together speak for around 40 per cent of SAB shares. Others might prefer equity too, to avoid tax liabilities for example. If half of the equity portion of the deal is paid for in stock, that leaves $50 billion to be raised in debt.

The burden will fall further because Anheuser will be obliged to sell some assets to satisfy competition authorities. It's a racing certainty that SAB's 58 per cent holding in MillerCoors, a venture with Canadian brewer Molson Coors, will go. That could fetch around $12 billion based on the valuations of similar traded companies. Elsewhere, there is overlap in China and potential conflicts of interest in the two sides' Pepsi and Coca-Cola bottling operations. There might be issues in Turkey too.

Say the merged company ultimately has to make $20 billion of disposals. It would be left with net debt around twice that carried by Anheuser at present - close to $95 billion.

Is that sustainable? Well, the group would lose some of SAB's current EBITDA as a result of the disposals. But it should be left with $5 billion of additional EBITDA, taking 2014's total and deducting the contribution from the United States, and, conservatively, the same again to cover lost profit in Asia and elsewhere. The annual total would be around $24 billion.

Paying down debt will require synergies. If Anheuser manages to elevate SAB's margins to its own run rate, annual EBITDA would rise by at least $1 billion. But even without that, a deal along these lines would leave the new mega-brewer with a net debt to EBITDA ratio approaching four times. That is a hurdle Anheuser looks capable of jumping.