SAB Shareholders Should Consider Offer say Analysts

Equity analysts have upgraded their fair value estimate for SAB Miller shares following potential takeover by Anheuser-Busch InBev

Philip Gorham 12 October, 2015 | 2:00PM

SABMiller (SAB) raised the stakes in its potential takeover by Anheuser-Busch InBev by doubling its cost-savings target to $1.05 billion in annual savings by 2020, up from its prior target of $500 million. We are raising our fair value estimate for wide-moat SABMiller to £39 from £36 as a result of this announcement and further movement in the GBP/USD exchange rate, but we continue to believe that the cash bid from AB InBev offers shareholders attractive value. As there is likely limited upside to the current offer, we recommend that SAB shareholders consider it carefully.

We retain our opinion that AB InBev's offer is attractive

This announcement indicates that our initial estimate of $1 billion in annual cost savings is too low. We now perceive significant upside to our initial estimate, because AB InBev can achieve cost synergies that SAB as a stand-alone business cannot, due to the duplication of some centralised and back-office functions across the two businesses.

Management's track record of cutting costs makes us more confident that AB InBev could deliver more savings than SAB. Zero-based budgeting and a highly competitive performance-based culture at AB InBev generate a laser focus on costs that has delivered cost savings even after acquisitions with limited geographic overlap, including the 2009 Anheuser-Busch acquisition.

Despite our increased fair value estimate, we retain our opinion that AB InBev's offer is attractive. For context, our estimate for the SAB share price at which a deal is value-neutral for AB InBev, at $2 billion in annual cost savings, is £44. This assumes valuation assumptions of 9.5 times and 15 times, respectively, for the MillerCoors and CR Snow joint ventures, which we expect to be sold as part of this deal.

As the current offer is close to that value-neutral price, we think AB InBev is not only offering a fair price, but is also assuming material execution risk on delivering on these cost-savings assumptions or on achieving higher valuations for its asset sales.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Philip Gorham  

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