RBC: Not So Fast, Inbev...SABMiller Merger Might Not Make Sense

• Anheuser Busch Inbev SA (ADR) BUD shares are up 1 percent year-to-date, despite a 6 percent decline since June 22.
• RBC Capital Markets’ James Edwardes Jones downgraded the rating on the company from Outperform to Sector Perform, while reducing the price target from Euro107 to Euro 100.
• Jones expressed concern regarding the company’s intended acquisition of SABMiller plc (ADR) SBMRY from various perspectives, adding that there is limited upside.

Analyst James Jones mentioned that while Nestlé seems to ensure that its potential acquisitions work from cultural, strategic and financial perspectives, the same cannot be said about Anheuser-Busch’s possible acquisition of SABMiller. He explained, “Culturally we think ABI and SABMiller are very different... Strategically it feels to us that ABI could be going to adapt its strategy to justify acquiring SABMiller.”

“Being a transformational deal some evolution of strategy should be expected, but this feels like it could take the company down a significantly different path to that which we’d envisaged,” Jones explained.

Financially, the deal could be worth about RBC’s base case of £39.5 per SABMiller share. Jones believes that since SABMiller is an efficient business, the available synergies from the deal would “likely be less (as a % of sales) than for Anheuser-Busch and Modelo.”

The analyst added that Anheuser-Busch’s approach to SABMiller had made a dent in his confidence in the former’s ability to go it alone, especially to generate increased top line growth. “At more than £40 per share we believe the financial justification for the deal would erode quickly,” the RBC report added.

“It feels unnatural to downgrade ABI in the throes of a deal, but we are struggling to see upside,” Jones commented.