SABMilleris the FTSE 100s biggest gainer today, after it emerged that the group had made an offer to acquireHeineken. Its widely speculated that this offer was made to fend off an offer from SABs much larger peer, Anheuser Busch Inbev SA. Indeed, it has emerged within the past few hours, that AB InBev could be talking to banks about arranging roughly 75bn of financing to acquire SAB.
The City has been speculating about the possibility of a deal between SAB and AB InBev for around a decade now, and it seems as if a deal is finally being discussed.
Nevertheless, SAB has made it clear that the group does not want to be swallowed by its larger peer. As a result, the company is trying to make itself too big to acquire. With the Heineken offer dead in the water, SAB only has a few options remaining, one of which is a merger with Diageo.
A deal between Diageo and SAB is not recent news; in fact analysts atBarclaysproduced an interesting report on the prospective deal earlier this year. Barclays analysts estimated thata tie-up of the two beverage giants would create a $170bn business, with annual free cash flow of approximately $8.5bn. Whats more, the combined group could save more than $700m per annum by combining global distribution networks.
Merger, not takeover
Unfortunately,Diageo is not an easy target for SAB, partly due to the fact that Diageo has a market capitalisation of just under 47bn, compared to SABs 62bn. Its likely that SAB would have to offer at least a 20% premium for Diageos shares, putting a price tag of around 56bn on the worlds largest spirits maker.
With this being the case, SAB and Diageo would have to undertake a merger of equals, the terms of which would take months to thrash out. Still, there is scope for the deal to go ahead, SAB has made it clear that the company does not want to be taken over by AB InBev, so a rushed merger of equals with Diageo may be the only alternative.
Whatever the outcome, its likely that investor will benefit as cost savings are driven through, profit margins widen and profits surge higher.
Another option analysts have discussed involves the sale of Diageos beer business to SAB.
Diageosbeer brands accounted for approximately 20% of net sales last year and the companys brand collection includesGuinness, the famous Jamaican lagerRed Stripeand Kenyas national beer brandTusker. City analysts believe that the sale of this business by Diageo to SAB could net Diageo enough cash to buy back 10% of its shares, or return a hefty chunk of cash to investors via special dividend.
Still a great company
Whatever course of action Diageo and SAB decide to take, one thing is for sure,Diageos defensive nature means that the company is a greatinvestment for you to tuck away in your retirement portfolio and forget about.
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