And rumours ofan impending bid for both companies have reached fever pitch during the past few weeks.
For example, Diageo saw its share price jump 7% in one day last week, after anunconfirmed report suggested that Brazils richest man, Jorge Paulo Lemann, might be behind a possible offer for the company.
Meanwhile, last month, it was believed that SABs largest peer,Anheuser-Busch InBevand theWarren Buffett-backed Brazilian private equity firm 3G Capital were in talks to make a knock-out offer for the worlds second largest brewer.
Running out of time
As I mentioned above, Diageo and SAB are no stranger to takeover rumours and, with this being the case, its difficult to believe the current chatter.
That being said, there could be some truth behind these rumours.
You see, private equity companies like 3G Capital are sitting on piles of cash as they struggle to find investment opportunities. Whats more, with an interest rate hike on the horizon, these companies are running out of time to borrow cash and lock in record-low interest rates.
As a result, the value of takeover deals has exploded this year as deal makers rush to complete tie-ups before interest rates increase.
So far this year, 27 mergers and acquisitions with a value greater than $10 billion have been completed worldwide a record number of deals.
SAB and Diageo are both attractive targets for any potential buyer.
SAB is the worlds second largest brewer and dominates several national beer markets around the world. Also, the group is one of the worlds biggest bottlers of Coca-Colaproducts.
SABoperatesfranchise bottlers of Coca-Cola products in10 markets. Non-alcoholic beverages such as water, fruit juices and malt beverages make up around 18% of SABstotal beverage volumes.
So, SAB is an attractive acquisition target; the company could attract suitors from all over, not just those companies interested in alcoholic beverages. EvenCoca-Colaitself could be interested in parts of SAB.
Diageo, too, is an extremely attractive target. The company owns some of the worlds best-selling spirit brands, includingSmirnoff VodkaandJohnnie Walkerwhiskey. Brands such as these, which have a high level of customer loyalty and international recognition, will be attractive to any buyer.
Time to buy in?
Should investors buy Diageo or SAB ahead of a potential deal? The answer to this question should be no; its never a good idea to try and second-guess possible takeovers.
However, Diageo and SAB are no ordinary companies.
The two beverage companies are sector leaders and have generated impressive returns for investors over the past decade. Diageo and SAB have outperformed the FTSE 100 by 95% and 259% respectively over the last ten years.
Moreover, the two beverage giants support appealing dividend yields that will provide you with a steady income if a takeover fails to materialise.
Diageo currently supports a dividend yield of 2.8%, and the payout is covered twice by earnings per share.SAB yields2.2%, and thepayout is covered 2.1x by earnings per share.
Diageo and SAB trade at forward P/Es of 21.1 and 21.5 respectively.
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