Pint-sized

SABMiller's Budweiser fightback lacks punch

SABMiller's promise to find $550 million of new cost savings by 2020 is paltry in the context of the $100 billion approach from AB InBev. SAB might have more powerful defences in its locker. It had better, if it wants to stay independent from the Budweiser brewer.

The promised savings are better than nothing. Coupled with previous commitments, the new initiatives put the company on track to reduce overheads by $1.55 billion between 2009 and 2020. The latest tranche comes out of an addressable cost base of $10 billion, the company said.

The modest commitment also serves as an implicit signal to its Belgo-Brazilian suitor, which has a big reputation for parsimony. The SAB board seems to be challenging the bidder to say how it can do better. SAB said on October 9 that it was making EBITDA margins of 38 per cent in its top 20 countries. That is an impressive number, even if some important details were missing.

The promise is paltry, however, because it is hard to see how it supports SAB's stated wish to keep out of Budweiser's clutches. SAB's share price before the AB InBev bid news became public may have reflected investor confidence that past success in cost cutting will be followed by future efficiency gains. In that case, shareholders have every reason to grab the bid premium that, on Breakingviews calculations, comes out at 37 per cent over the undisturbed price.

Besides, the core of the value argument between the SAB and Budweiser boards concerns top-line growth rather than cost synergy benefits. This is a deal that will be done, probably, if the two sides can agree on how much SAB's exposure to emerging markets, notably Africa, is worth.

Still, if there's no agreement on that, SAB's shareholders may require better reasons to back their management. Time is short, too. If there is no deal, UK takeover rules require AB InBev to either make an offer directly to SAB shareholders or go away for at least six months by next Wednesday.

SAB's relatively low balance-sheet gearing gives it some financial firepower. The case for the defence, however, is not yet made.