PepsiCo still fly in ‘compelling but complex’ SAB Miller/ABI ointment?

A Pepsi billboard in Latin America (Matthew Rutledge/Flickr)

With increased market chatter over AB InBev’s possible purchase of SAB Miller one analyst warns that the former’s bottling deal with PepsiCo in Latin America remains one barrier to a deal.

In a recent note Shore Capital analyst Phil Carroll describes the rationale for a mega merger as “compelling but complex”: compelling due to possible cost synergies and limited geographic overlap.

Let's take a look at the geographical issue. SAB Miller has limited exposure to Western Europe and is strong in emerging markets such as sub-Saharan Africa (where ABI is not present), Colombia and Chile, where the growth outlook for beer growth and profit is rosy; ABI brings stronger profit margins but thirsts for greater exposure in such territories, its top four markets are the US, Brazil, Mexico and China.

However, Carroll warns of competition hurdles in some markets that could present an obstacle to any deal, principally the US, where the merger (there is talk of SAB Miller fetching a cool $100bn) would require either Molson Coors or a third party to acquire SAB’s stake in their joint venture Miller Coors.

What would ABI have to offer for SAB Miller?

Another factor to consider is the investment objectives of SAB’s two key shareholders, Altria and the Santo Domingo family, Carroll says, which have stakes of 27% and 14% in SAB Miller.

“What would ABI have to offer for both parties to agree to a merger? We suggest a significant premium, probably ahead of the typical 30%, and also an ongoing interest in the larger entity,” he writes.

“We should not forget that the premium would be on top of an already strong valuation,” Carroll adds.

A further complication is ABI’s relationship with PepsiCo in Latin America where SAB Miller is a Coca-Cola bottler, Carroll notes; the analyst thinks ABI would have to break its relationship with PepsiCo.

“Then there is ABI’s recent corporate activity where it relatively recently (April 2014) completed the re-acquisition of Oriental Brewery in South Korea, following selling it in 2009,” he writes.

AB InBev has its hands full with Grupo Modelo

“It is also continuing to integrate the acquisition of Grupo Modelo in Mexico where there is a significant cost savings program target in place -- $1bn by the end of 2016 – so it seems there is plenty of work going on aside from day-to-day beer production.”

Taken together with ABI’s sponsorship of the Brazil’s World Cup in that key market, and others globally, Carroll believes a bid for SAB Miller in the short term “seems unlikely, in our view”.

Discussing SAB Miller’s full-year 2014 results announced on May 22 – there was no mention of the ABI chatter in conference calls with US and UK analysts – Carroll says net producer revenue fell 1% to $26.719bn due to currency exchange effects in LATAM, Africa and Australia.

However, organic group EBITA rose 7% ahead of market expectations in the year to March 31, he adds, with strong bottom-line performance driven by an 8% increase in North America due to cost efficiencies and procurement savings, despite a 3% dip in volumes here.

Notwithstanding strong profit performance in LATAM (+10%), Africa (+13%), South Africa (+7%) and progress in Asia Pacific, organic EBITA fell 15% in Europe, Carroll said, mainly due to volume declines and a negative mix in key markets Poland and the Czech Republic – both hit by bad weather in H1 2014.

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