Digging deep

AB InBev must change spots to make SAB deal work

Anheuser-Busch InBev chief Carlos Brito has a fearsome reputation for cost-cutting. He will need it to justify the $104 billion AB InBev has offered for SABMiller. But the Budweiser brewer will also have to create growth to make the bid stack up.

The SAB board agreed in principle to a cash offer for the shares at £44 ($67.06) on October 13. That is a 50 per cent premium to the SAB share price before the bid interest became public knowledge on September 16. As in the previous, rebuffed offers, it is a two-tier offer and the share-based alternative is less generous. Either way, it is a big chunk of money.

One big change is that BevCo, the Santo Domingo family shareholder which speaks for around 13 per cent of SAB, seems willing to play ball. Practically, that was always going to be necessary. Together with Altria, the tobacco company that has about 28 per cent, 41 per cent of the consideration is likely to be met in stock. That takes the blended premium to just over 43 per cent.

If Anheuser expects to pay for the premium out of cost cuts alone, it will have to save the equivalent of 27 per cent of the revenue over which SAB has control, Breakingviews calculations suggest. The implied $3.1 billion per year - at least double what Bernstein analysts say might be achievable based on similar deals - compares with just $550 million of additional annual savings SAB found on October 9.

AB InBev has tended to do better on post-deal cost savings than appears likely at the outset. This time it is complicated because SAB generates around 40 per cent of its sales in associates. Some of these, notably in the United States and China, may have to be sold. Equally, however, AB InBev may find ways of working its cost-cutting magic on businesses it holds at arm's length.

Africa, arguably the most attractive part of the SAB business, is where the deal will stand or fall. With little overlap between the businesses, Anheuser will have to spend heavily on infrastructure, product development and marketing. Dealing with different governments, and cultures, may stretch its talents. This new era of mega-beer will require Brito to show some new skills.