I thought it could be a roller-coaster ride for SABMillers(LSE: SAB)shareholders on Monday, but it may actually turn out to be a fantastic time to be invested in the company. Heres why.
Whats Going On
SAB approached Heineken over the weekend, and itwas rejected quite swiftly. The Dutch brewerscontrolling shareholders intend to preserve the heritage and identity of Heineken as an independent company.It isnt over yet, in my view, althoughSAB doesnt need to make a comeback.Or does it?
According to market rumours, theHeineken family has been approached by SAB as the latteris looking at ways todefend itself from a takeover by AB InBev. So, is the SAB/Heineken story a matter of price or strategy? Whats next?
Market Reaction
The stock of Heinekenwas up only 2% in early trade, but SAB gained almost 6% in a declining market. The shares of AB InBev have risen by 1.2%, in the meantime. This makes sense: the market is betting on a takeover of SAB, rather than on a change of ownership at Heineken. AB InBev wont sit on the sidelines for long as its own equity valuation needs deal-making to receive a fillip.
Investors arent too worried that SAB may pay over the odds to secure Heineken. They dont seem bothered by the possibility that SAB will stretch its finances to secure a target that essentially is a play in mature markets. They probably know that Heineken is not an easy target, while the interests of SAB shareholders would be better preserved if itbecame part of AB InBev.
Problems?
Heineken is not the most obvious cultural fit for SAB, and any bid would have to be largely financed by equity, which means that the Heineken family would end up being one of the largest shareholders in the combined entity. This isnt good.
Moreover, I think synergies will be more difficult to achieve than in a SAB/AB Inbev combination. The Dutch brewers main attraction resides in its Heineken brand, which has lost some of its sparkle of late, in my view. The emerging market exposure of Heineken is limited, and the markets where it operates such as rural Mexico via FEMSA Cerveza arent exactly growing at a fast pace.
Heinekens founding family controls Heineken via a holding company. As I noted last week, when I wrote that SAB was ripe for a bid by AB InBev, SAB is the most obvious takeover target in the sector, whileAB InBevis the most obvious acquirer. Heineken still presents a complex shareholding structure, which prevents a change of ownership, I added.
Heineken stock looks fully valued based on its trading multiples. Heineken has a market cap of about 34bn euros, but has also a net debt position of abut 10bn euros, which means the total enterprise value would be about 60bn euros, including a 30% takeover premium. For SAB, such a deal is doable, yet something else may lie ahead for its shareholders
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
