The downside inSABMiller(LSE: SAB) stock is worringly clear for shareholders at the moment. First, AB InBev could look at PepsiCo to strike a jumbo deal, according to latest market rumours. Second, SABs revenue growth came in below consensus and is driven by prices rather than volumes, second-quarter results showed on Tuesday. For its part,Diageo (LSE: DGE) (NYSE: DEO.US) should continue tobenefit from weakness in SABs equity value if the lattersstock sinks.
A Safer Bet
SAB stockhas given up all of the gains it made on 15 September when a takeover bid seemed just around the corner. Thats about 13% in less than one month. By comparison, the shares of Diageo have lost 4.5% of value over the period, while the FTSE 100has dropped 6.8% as the shares of more cyclical assets have been badly hit.
I have been saying for some time that Diageo is a safer investment than SAB, although Diageo has its own problems. SAB stock still trades above its unaffected price of31.10; investors believe that a takeover is much less likely now than a month ago, but they havent been convinced that SAB wont be swallowed by AB InBev.
With regard to a possible AB InBev/PepsiCo tie-up, AB InBev and its advisers have long studied whether a merger with the $142 billion soda and snacks company makes strategic and financial sense,Bloomberg reported on Monday. However, no talks are happening now, no deal is imminent, and such a scenario is among many that AB InBev has looked at, Bloomberg sources added.
There arent many alternatives for AB InBev, in my view.
How Likely Is A Takeover Of SAB?
SAB recently said it doesnt needHeineken –-which rejected SAB on 15 September to defend itself from suitors. Shareholder value is at stake, and SAB management must know that their investors need more than a statement of intention from their leaders to stay invested in the company. The stock is down 1.7% in early trade on Tuesday in the wake of second-quarter results, which were rather disappointing.
SAB is an excellent company whose valuation, however,has been boosted by M&A rumours since May. What appears evident is that SAB may be taken over only if its stock weakens further. Furthermore, a takeover by AB InBev could work on paper, but there are hurdles. The main issue is the take-out price.
If SAB stock drops below 30, though, an opportunistic bid from AB Inbev valuing SAB at 30/32 a share could be conceivable.
The fortunes of Diageo are intimately tied to those of SAB. These two businesses are very similar in terms of profitability, end-markets exposure and growth prospects. As such, any valuation gap SAB stock has traded at a premium for most of the year between the two must be justified, and its not right now.
The spread between their relative valuations has narrowed significantly in recent weeks, and trends should continue to favour Diageo. Investors must choose one of the two if they want a benchmark investment in the beverage sector, and SABMiller is led by management who arent brave enough to bid up for Heineken and may not even be able to agree a deal with AB InBev.
So, no surprise that Diageo is outperforming SAB by one percentage point today
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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.