Does An AB InBev-SABMiller Merger Make Financial Sense?

• In a report issued Thursday, analysts at RBC Capital Markets look into Anheuser Busch Inbev SA (ADR) BUD’s combination with SABMiller.
• The firm maintains a Sector Perform rating and 100 Euros price target on shares of Anheuser Busch Inbev SA ABI.
• Shares of Anheuser Busch Inbev –in the NYSE- are up more than 1.5 percent on Wednesday trading.

RBC analysts James Edwardes Jones and Mirco Badocco share some of his thoughts regarding the Anheuser Busch Inbev and SABMiller combination. According to the research note, they believe that, at £44 per share in cash -- plus a share alternative that brings the blended price to roughly £42 per share, the merger will be value accretive for SABMiller’s shareholders, but not AB InBev’s.

It is on the back of the expectation of neutral value accretion for AB InBev (from the acquisition of SABMiller) that the firm reiterates a Sector Perform rating. However, they add, AB InBev’s management can prove them wrong – although that “will be a big ask.”

The experts highlight a couple other key issues to take into account.

1) They were expecting InBev’s management to “come up with a piece of magic in this process, and so they did.” The analysts believe that persuading Altria and BevCo to accept the share alternative roughly 11 percent below the £44 per share cash price on the table for SABMiller “is tantamount to getting away a 1 for 5 rights issue at an 11% premium to the existing share price.”

2) Despite the aforementioned “magic” that management pulled, value accretion will be difficult for InBev. Assuming synergies of 15 percent from acquired sales, the experts estimate that the proposed purchase will enhance InBev’s EPS by 15 percent. However, as noted above, the firm expects the value accretion to accrue to SABMiller’s shareholders, rather than InBev’s. “We might be underestimating the prospect for revenue synergies or a meaningful step up in the industry’s profit pool (over and above the synergies) as a result of such mega-consolidation, but do not feel sufficiently confident to factor either of these into our assumptions,” they conclude.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.