Again, similar to my CFA challenge post. This post is not solely my own work. It was a group effort for a University project so I’m not in any way trying to take sole credit for this work. Neither does what’s written here wholly represent my thoughts or efforts either.
Feedback is encouraged, but to be honest, I know it’s nowhere near perfect so please don’t flame me to high heaven for this if you don’t agree with something. But feedback is still appreciated and would love to chat about it if you have any thoughts.

Just hoping someone might find this interesting or useful. 🙂

Contents

• Industry Overview of Target Firm and Bidder
• Participants in the Merger
• Overview of Historical Financial Performance of AB InBev and SABMiller
• Motivations for the Merger
• Timeline of the Deal
• Valuation of Merger
• M&A Financing & Impacts of Financing
• Defences and Strategies Employed
• Advantages and Disadvantages
• Post-Merger Performance
• References
• Appendix

Industry Overview of Target Firm and Bidder

Industry

To start with a bit of information on the industry of the target and bidding firms, two years before the merger and at the end of 2013, and the global beer market was estimated to be of a value of at least $500 Billion (MarketLine, 2014).

Global beer market share as a percentage share of total volume listed AB InBev the largest at 20% of volume, with SABMiller at 12% and then Heineken and Carlsberg at 10% and 5.5% respectively (See Figure 1 in the Appendix for a pie chart). Overall the global beer market is fairly heavily concentrated in terms of competing firms, with the top four firms commanding a tad under half the total available market at 47.5%. Overall in the past five years, in the global beer manufacturing industry, the total number of businesses has grown by 14.6% (Couillard, 2018).

Furthermore, as beer market sales are slowing in growth or even stagnating as shown in Figure 2 in the appendix, companies within the industry may see mergers and acquisitions as an avenue for growth and expansion as wanted by shareholders.

Bidding Company

The bidding company, Anheuser-Busch InBev (also known as AB InBev), is a multinational drinks corporation, operating in the sector SIC-2082, which is Malt Beverages. Prior to the acquisition of SABMiller, they were the largest brewer in the world, with around 27% of global volume. AB InBev was responsible for such brands as Budweiser, Corona, Stella Artois and many more.

Target Company

SABMiller before being acquired was headquartered in England and was also a multinational brewing company known for such drinks as Miller beer, Fosters and Tyskie. SABMiller was the second largest in the world when it came to global beer market share before being taken over by AB InBev.

Industry Performance and Influence

Overall the beer and brewing industry has seen stagnating and slowing revenues as shown in figure 2, meaning that AB InBev saw this merger as a chance to increase revenue and market share in a market that was becoming increasingly competitive and harder to grow in. At the time, the Financial Times was quoted as saying it was the third-largest acquisition in history and the largest acquisition ever in Britain. The merger between AB InBev and SABMiller was an example of a horizontal merger in the industry, as it decreased competition within the Malt Beverages industry.

Government Regulations

One of the most significant hurdles in the merger acquisition process of SABMiller was antitrust and competitive laws resulting from the two companies potentially controlling over 30% of the global beer market.  In a Senate hearing, it was recommended that the Justice Department should require AB InBev to divest of its company-owned wholesalers in addition to changing their behaviour which accused the way they distributed rival products as anti-competitive (McLaughlin, 2016).

Participants in the Merger

Target Firm and Bidder

In this case, SABMiller was the target firm and Anheuser-Busch InBev (also known as AB InBev) is the bidding company. SABMiller and AB InBev are both listed firms. SABMiller was listed on the Johannesburg Stock Exchange as well as the London Stock Exchange. AB InBev is listed on the Euronext, NYSE, JSE and the Mexican Stock Exchange.

Other Participants

Other participants included the management staff of the bidding and target firms. Also, there were the lawyers who provided legal expertise for areas such as tax, intellectual property and antitrust issues.  Financing institutions and investment banks also were a part of the process is helping finance the cash required for the takeover. Auditors and accountants also were used to calculate the synergies after merger, performing due diligence and organising the optimal tax structure.

Overview of Historical Financial Performance of AB InBev and SABMiller

For the period before the acquisition for 3 annual periods, ending at 31/12/2014, AB InBev’s accounting and financial performance for the previous year included the following data as shown in Table 1 below.

In contrast, the target firm SABMiller accounting and financial performance for the previous 3 years included the following data as shown in the table below.

AB InBev’s and SABMiller’s Pre-Deal Performance

As shown in the table above, SABMiller had some pretty outstanding growth not only for themselves, but also relatively compared to other competitors, the beverage index and the overall S&P 500 index. This rapid and market beating growth may have been a key reason for AB InBev wanting to acquire SABMiller as both the S&P 500 and Beverages index have seen decent but less than stellar growth when compared to SABMiller. Once seeing this growth AB InBev may also have thought they could help improve these growth rates through their economies of scale and by financial and operational synergies.

Motivations for the Merger

Operational Aspect

In an operational aspect, the merger of SABMiller and AB InBev will make the combined firm own at least 30% of beer production output in the world. Some operational motivations for the merger are:

1. The merger contributed to the complementation in geographic sales which spreads the business of the new firm around AB InBev’s traditional main markets, which includes the emerging markets such as Africa, South east Asia and South America.
2. Both firms can share practical experience and industry know-how to create new growth opportunities, the combination of two firms will be helpful with product innovation and launching new and more popular flavour beers to accommodate the local tastes in different locations around the world.
3. The African continent is the greatest potential market in the world. With the increasing number of middle class and fastest GDP growth rate, the power of consumption in Africa will increase to a new level and will likely become largest growth opportunity for the new firm. The development of SABMiller could be traded back to 19th century. The strong foundation and rich experiences of SABMiller in Africa is one of the significant reasons for the merger.

Financial Aspect

In a financial synergy aspect there are a number of reasons for the merger between the two firms:

1. The share price of bidding company AB InBev increased to its historically highest point, with its market value over 200 billion US dollars after merger.
2. The share price of the target company also increased to a historical new point. It makes the merger more of a win-win situation. Overall SABMiller generated 64 billion US dollar in sales and 24 billion EBITDA.

Timeline of the Deal

1^st Proposal

The first proposal was made on the 16^th September 2015, when AB InBev approached SABMiller for a merger by offering a share price of £38 in cash. Once the merger was publicized, SABMiller’s share price soared significantly, thus SABMiller rejected the first offer which according to them AB InBev had undervalued their present value.

2^nd Proposal

On the 6^th October, AB InBev made a second proposal with the same term of payment but an increased the share price to £40 ($57.83 USD).  However, the board of SABMiller and the shareholders remain firm on their decision and rejected the proposal once again.

3^rd Proposal

A third proposal was made on the 7^th October 2015, AB InBev made a third offer to SABMiller with an improved offer of £42 or $60.93 per share. However, after being rejected twice, AB InBev changed its strategy to acquire SABMiller. This time it proposed two different options; cash payment and a cash-and-stock option, which allows the shareholders to remain invested in the beer industry while avoiding taxes on a large cash payout.  The cash-and-stock would be combination of a 0.484 share of a new class of restricted stock in the new AB InBev plus a cash payment of 2.37 pounds, $3.43. The cash-and-stock deal was exclusively designed for the two largest shareholders of SABMiller, which were namely Altria Group, owning 26.6% of SABMiller and BevCo controlled by the Santo Domingo family of Colombia owning 13.3% of interest in SABMiller while other shareholders will receive cash payment for their shares in British pound sterling.   However, to the surprise of AB InBev, only Altria Group provided a positive response to the deal while the other shareholders rejected the bid price again.

4^th & 5^th Proposal

AB InBev became hostile with its 4^th and 5^th offers and started pressurizing SABMiller with the support of Altria Group to make a unanimous decision and reach a conclusion.  After a meeting both parties, AB InBev increased the share price offer to £43.50 pounds, $62.88, with the cash-and-stock option to 3.56 pounds, $5.14 on 12 October 2015.  Despite pressure, SABMiller’s board and shareholders remained united to their decision as they were confident that the merger could bring more value compared to what they were offering.  The offer was rejected again by SABMiller which forced AB InBev to increase its price a final time to £44 or $63.60 per share and increased the cash payment in the cash-and-stock option to 3.7788 pounds ($5.46) on the 13^th October 2015. Finally, the chairman of both companies gave their consent and the deal was finalised at £44.  AB InBev also offered a breakup fee of $3 billion payable if regulators or its own shareholders failed to approve the takeover. All of the issues related to antitrust and shareholder rights were settled after nearly one year later and the merger was finalised on 10^th of October 2016.

Valuation of Merger

Cashflow Valuation

Relative Valuation

As AB InBev and SABMiller is a horizontal merger, with both businesses being in similar industries, we have utilized Bloomberg’s relative valuation function (As seen in Figure 3 of Appendix) to see other similar companies and what prices relative to their business.

The relative companies include Heineken and its holding company, Carlsberg, Davide Campari Milano, C&C, Remy Cointreau, Diageo and Pernod Ricard.

For the Relative valuation we will use an equal weighting between the 2 ratios of Price to earnings ratio and Price to book ratio.

Based on the group’s median P/E ratio of 26.86, this means based on SABMiller’s $3,546.6m of net income. The relevant market value for the firm would be $95,261.7 million. Based on the group’s median P/B ratio of 3.67, this means based on SABMiller’s 27,482m of book value, The relevant market value for the firm would be $100,858.9 million.

After weighing these two ratios equally at 50%, the total relative value gives an expected value of $98,060.30 million, or a tad under $100 billion.

Fair Value Estimation

For the estimated fair value of SABMiller, we decided to use a combination of the Relative Value Estimate as well as the discounted cash flow method. As SABMiller is a cash flow generative business and not too many mergers this size has happened before, we decided to use a weighting of 70% for the DCF and 30% for the relative valuation method.

Using AB InBev’s finals total offer price of US$107 billion, compared with our estimated value of $123 billion, we believe that AB InBev’s offer was undervalue by a decent margin. This represents a potential paid discount below our estimated valuation of around 13%.

M&A Financing & Impacts of Financing

Since the acquisition of SABMiller was an all-cash deal, it was paid by taking on a massive amount of debt.  AB InBev financed its $100 billion-plus bid for SABMiller with a syndicated loan of $75 billion (See figure 4 in the appendix for structure) which was raised from the loan markets with the finance agreed to by its key relationship banks.

The bridge loans were to be refinanced by bond issues.  Besides AB InBev’s planned to repay the bridge loan by selling Miller Coors for $12 billion and used the funds to repay the disposals bridge of $ 10 billion then in turn to repay the two-year bridge of $15 billion and one-year bridge of $15 billion. 

The bridge loans were to be paid off initially by the sale of Miller Coors for $12 billion, with the rest coming from bond issues. The loan had a negative impact on the company’s earnings per share which in return affected the payment of dividend to shareholders.  By merging together, the two companies’ net-debt-to-earnings before interest, tax, depreciation and amortisation ratio would increase to 4.5 and would be one of the highest in the booze business.  When we look at future performance, in the third quarter, after the merger with SABMiller, the results were quite weak, and AB InBev had to cut its dividend payout in half.  This had a negative effect on the stock price as it dropped by 10% because the company needed to conserve cash to reduce its massive debt load, which has swelled to $109 billion. AB InBev’s priority became debt reduction which was going to be achieved by a cost savings strategy and by decreasing dividend pay outs.   The company’s aim was to reduce net debt to about 2 times earnings.  In 2017, AB InBev paid only approximately $8 billion of dividends to shareholders, which was 50% lower than previous dividend payments.  The cut allowed the company to save roughly about $4 billion in cash annually and all of which was meant to pay down debt.  This decision had a significant impact on the large proportion of shareholders. 

Defenses and Strategies Employed

When AB InBev initially approached SABMiller, they began their approach privately as they hoped it would be a friendly merger between two giants in the brewing industry. However SABMiller rejected AB InBev’s offers, as such the friendly approach turned to a more hostile approach “hostile lite,” which refers to an approach whereby an acquirer/the bidder puts its terms direct to a target’s shareholders.

AB InBev applied the two different takeover strategies which were the integrated and distributive approach. In the integrated approach, AB InBev specified how the merger would benefit both companies as they would be set to make up 33% of the worlds brewers. In the distributive approach, in the event the merger was to go through, Sab Miller would have to dissolve some of its ventures such as their Miller Coors stake.

The biggest hurdle was to negotiate with the two major shareholders Altria (27%) and BevCo (14%) of SAB Miller who in total held 41% of the shares as no decision could be made without their approval.

AB InBev Privately approached Sab Miller with and offer to buy Sab Miller and they offered 38 Pounds per share, Sab Miller out rightly rejected this buyout offer as they believed the offer undervalued Sab Millers shares (Blenkinskop & Geller, 2015). AB InBev continued with further negotiation in private hoping for an approval. They made two more raised offers which were 40 pounds and 42.15 pounds but all these offers were still rejected.

AB InBev also adopted the aggressive style of negotiation as they wanted things to be done and wanted results. Mr Carlos Brito, the CEO, mentioned that they wanted to use a friendly approach but were not going to rule out going hostile if SAB Miller did not co-operate (Blenkinskop & Geller, 2015).

AB InBev went public with their offer of 42.15. This offer included a discounted cash flow and share offer to the company’s two main shareholders that is Altria and BevCo. The discounted Cash flow was meant for the shareholders not to incur huge sums of tax. AB InBev eventually got the favour of the Altria group as they backed this merger but BevCo was not on board as yet and BevCo stood by the board in rejecting this offer. Sab Miller’s chairman presented a case to the BevCo representatives and convinced them that AB InBev would benefit more out of this merger than Sab Miller did and the rest of the board agreed. AB In Bev Co’s move of going public was a technique of trying to corner and pressure Sab Miller which was not working in their favour.  

AB InBev then asked for a private meeting with the Chairman of SAB Miller and member of the board who were familiar about this deal. AB InBev made a proposal of 43.50pounds per share and at this stage SABMILLER, was ready to engage in these negotiations. AB In Bev managed to get the backup of the BevCo shareholders who held 14% by revisiting their terms of offer on the cash component of the partial share plan, by raising the cash component by 50% to 3.56 pounds per share from the 2.37 pound per share they had previously offered (Atlanta, 2015).

Advantages and Disadvantages

Advantages of The Merger for AB InBev

AB InBev’s aim was to gain thirty percent of the global sales market by merging with SABMiller.  The estimated annual sales for the merged company were estimated to be US$55 billion approximately.  Another key gain for AB InBev was to increase its geographic footprint and gain control over the African and Middle East markets.  AB InBev merger with SABMiller was more to conquest the emerging markets because it already has already had an established business in developed countries and growth was stagnating.  The goal was to gain access to emerging markets where it had a lack of significant presence, but SABMiller had a firm market share. The strong brand image and distribution channels which SABMiller had, was an opportunity for AB InBev to increase reach and availability through globally renowned brands like Budweiser and Corona. The synergy benefits derived from the merger were: reduction in overhead expenses; integrating best practice and expertise; combined sourcing of raw materials and packaging materials, and brewery and distribution efficiencies and through tax savings and economies of scale. The merger gave rise to growth opportunities in both developed and developing markets. Thus, the combination with SABMiller was going to make AB InBev become a well-diversified global beer business.

Disadvantages of the merger for AB InBev

In the years leading up to the merger there had been speculation AB InBev was looking to acquire SABMiller.  However due to its high level of debt taken to finance former mergers and acquisitions it had to delay the merger with SABMiller. The acquisition of SABMiller could subsequently dent the company’s finances and future performance.  Even after the sale of SABMiller’s interest in MillerCoors, AB InBev’s net debt to Earnings before interest, tax, depreciation and amortisation ratio could rise to about 6.5, in order to finance the combination. AB InBev has been looking to lower its debt to Earnings before interest, tax, depreciation and amortisation ratio, which rose to 2.49 after the acquisition of Oriental Brewery, from 2.26 at the end of 2013.  AB InBev’s level of debt could increase significantly.

As a Shareholder in SABMiller, Would We Support the Deal?

If we were SABMiller shareholders, we decided we would not support the deal.  Firstly, because the offer still seemed low compared to the multiple advantages AB InBev was going to benefit by acquisition.  Also because AB InBev created two types of payment options, which one was cash-and-stock option but was only for the two major shareholders who own a combined 41 per cent of the SABMiller interest.  The aim for AB InBev was to make the deal attractive by making the shareholders avoid the huge tax implication on the capital gains. Except the rest of fifty-nine per cent shareholders were to be paid in cash for the shares they hold in SABMiller, which we deem was quite unfair.  Moreover, the British pound dropped against the U.S. dollar, largely a result of Britain’s vote to exit the European Union. This was another plausible reason to make AB InBev increase the offer because the originally price was less compared to what was supposed to be before the currency price drop.

Post-Merger Performance

Market Performance

AB InBev stated that the takeover was going to strengthen their position in emerging markets such as Asia, Central and South America and Africa, as prior to the merger Ab InBev did not have much access to these markets.

A ratio analysis was carried out to try and track the performance of AB InBev after the merger. Overall, we can conclude that AB InBev, was and is performing well by analysing the financial information. The debt to equity ratios are high as AB InBev had to acquire loans for them to be able to carry out the buyout.

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