SABMiller time?

AB InBev setback may hasten last round of beer M&A

A deal setback for Anheuser-Busch InBev may ironically hasten a last round of consolidation in beer. The US Department of Justice opposes AB InBev’s $20 billion plan to buy out the other half of Grupo Modelo, the Mexican group behind Corona. The world’s largest brewer may yet find a workable compromise. But if not, an obvious plan B exists: the long-rumoured takeout of SABMiller.

The DoJ worries drinkers will pay more, and industry inventiveness will stagnate, if the No 1 brewer gains full control of distant No 3. It also does not think a 10-year deal to distribute Modelo’s US brands through a third party will really safeguard competition.

AB InBev needs to salvage the deal without destroying its economics. Besides mounting legal counter-arguments, structural tweaks could help. So the distribution deal could be made more permanent. Or selling some other US businesses could hold AB InBev’s market share constant. Liberum Capital argues, bullishly, that the DoJ’s case on pricing and innovation can be challenged - in which case shedding a cheaper US brand such as Natural or Busch might be enough to rescue the takeover.

If all fails, AB InBev has other options. It throws off oodles of cash: Nomura reckons trading cashflow totalled $8.1 billion in 2012. That allows rapid de-gearing, but also means AB InBev’s balance sheet can quickly turn flabby.

Paying shareholders more would be one response; buying out minorities at subsidiary AmBev another. But the boldest move would be for SABMiller, which - unlike rivals Heineken and Carlsberg - lacks controlling shareholders. This would be a bold move: SAB’s equity value is roughly £50 billion, before a premium. But two groups, Altria and Santo Domingo, who own about 41 per cent, might take AB InBev stock as payment. Mandatory selloffs in the United States and China would cut the cash outlay further.

The deal is not a slam-dunk. AB InBev likes a bargain and SAB is pricy: the shares trade well above historical valuation multiples. Cost-cutting potential is slimmer than in previous deals. And competition watchdogs might object again. But AB InBev would tilt decisively towards emerging markets, which would make up roughly 60 per cent of sales. That is an intoxicating proposition.