Markets live chat transcript for the chat ending at 11:38 on 27 May 2008. Participants in this chat were: Sam Jones (SJ) Paul Murphy (PM)
SJ:
Welcome to Markets Live
SJ:
This is FT Alphaville’s daily stock market discussion.
SJ:
I’m Sam Jones
SJ:
It’s 11:00 BST
SJ:
We’ve had something of a reshuffle here on ML.
SJ:
Neil Hume has swanned off on holiday.
SJ:
So I’ve had Murphy tearing around trying to find stories.
SJ:
He’s just logging on
SJ:
Yep throg – a coup
SJ:
But at least i make Markets Live run on time
SJ:
Obviously, cos Murphy is Neil Hume this weak he’s got tech problems.
PM:
Im hear, im hear.
PM:
Jeeeez
PM:
PM:
Let’s get one thing straight a the outset.
SJ:
What’s that?
PM:
The ML sessions are going to be truncated this week.
SJ:
Well, let’s see how it goes.
PM:
See how it goes? I can tell you how its gone – badly.
PM:
I can’t do two jobs at once, while also interviewing people for Helen’s job, and fire fighting on Anheuser.
SJ:
SJ:
I’m sure you will get better with practice.
PM:
(Thanks BG
)
)PM:
Hmmm – well readers should not expect more than half an hour of banter today.
PM:
Unless they want to provide it.
SJ:
Come on Murphy, stop killing time. Get on with it.
PM:
Er, yes, OK Sam. Will do.
PM:
SJ:
SJ:
Talking of Anheuser, what’s the latest.?
SJ:
For those who were not around last week, we rather chaotically revealed the fact that InBev is very well advanced with a plan to take over Anheuser-Busch.
PM:
Was planning a letter to the Anheuser board, setting out 65 dollar terms – valuing the company at $46bn.
SJ:
But we’ve been so kind as to save InBev money – saved them the postage.
PM:
Also cost them money, if they pursue this deal.
PM:
Bud stock closed at 56.61 on Friday.
SJ:
So $65 will no longer suffice
PM:
No way – they will have to pay 70/75 to get it.
PM:
That significantly increases the size of the debt package required by InBev – and also possibly the size of the rights issue it ultimately launches to pay down its debt.
PM:
I can tell you that InBev – before Friday’s developments – was looking at a rights issue of around $15bn.
SJ:
Seriously chunky cash call.
PM:
Yes, — in about 12 months time tho.
SJ:
Anyway, we’ve put up a few smaller posts on the subject – filler detail.
PM:
May have more to come – though we are not planning to release it thru a special ML session as on Friday.
SJ:
Think we rather tested people’s patience then.
SJ:
even got a virtual slow hand clap
SJ:
Very post-modern, don’t you think – letting the readers see the whole process of standing a story up
PM:
Hmm. Painfully post-modern.
PM:
Almost any old rubbish passes for Art nowadays.
PM:
Anyway the story has moved on today.
SJ:
In which direction?
PM:
Towards SABMiller.
PM:
We reported in Saturday’s paper that InBev were looking at a merger with SAB as a Plan B.
PM:
They’ve actually had low level, ultra informal, deniable talks with SABMiller.
PM:
But SAB have said they cannot and will not talk terms until they have finished sorting out their new joint venture with Coors Moulson – Coors Miller.
PM:
So nothing there immediately
SJ:
So how has SAB reacted this morning?
PM:
Through the roof. Pirce is up 7%
PM:
Actually — up 87p at 13.11 currently
SJ:
That’s quite a move when InBev’s preferred deal is with Anheuser
PM:
Well, the thinking is summed up quite nicely by Merrill Lynch.
SJ:
Who are saying what?
PM:
Brewing M&A becoming more aggressive and creative
We maintain our Buy opinion on InBev with a stand-alone price target of €56/shr and 5.9% DY. We do not believe that management as shareholders will do a deal
that compromises shareholder value. Controlling shareholders are locked in for 20 years. Value created by acquiring Bud, would be largely the NPV of cost saves,
leaving the enlarged company with slower growth, but increased cash generation.
Deal does not have to be imminent; AmBev tax opportunity
A deal with Bud does not have to be imminent, as no other brewers can acquire Bud. However the detail quoted by the press may lead the market to believe a deal to be imminent – remember S&N? If InBev was to use equity for a deal, it would certainly not do so after a tough quarter. Furthermore mngt recently bought shares in the market. We think AmBev remains an attractive vehicle if equity is to be used,
presenting the potential to utilise a goodwill tax break for Brazilian companies.
We maintain our Buy opinion on InBev with a stand-alone price target of €56/shr and 5.9% DY. We do not believe that management as shareholders will do a deal
that compromises shareholder value. Controlling shareholders are locked in for 20 years. Value created by acquiring Bud, would be largely the NPV of cost saves,
leaving the enlarged company with slower growth, but increased cash generation.
Deal does not have to be imminent; AmBev tax opportunity
A deal with Bud does not have to be imminent, as no other brewers can acquire Bud. However the detail quoted by the press may lead the market to believe a deal to be imminent – remember S&N? If InBev was to use equity for a deal, it would certainly not do so after a tough quarter. Furthermore mngt recently bought shares in the market. We think AmBev remains an attractive vehicle if equity is to be used,
presenting the potential to utilise a goodwill tax break for Brazilian companies.
PM:
“Plan A”: InBev buys Bud for cost savings
An InBev & Bud combination offers limited true “synergies”, but the press
speculates that InBev can take $1.4bn cost out of Bud by 2011E. Assuming a $70
acquisition price and $1.2bn cost savings would enhance EPS by more than 30%
if debt financing is used. EPS enhancement reduces to around 20% if combined
with equity. ROIC will however only reach 6%, below WACC. See pages 7 to 11.
“Plan B”: SABMiller offers regional scale and growth
On paper this deal poses limited anti-competitive issues and offers regional scale
synergies, but seems largely hypothetical. On pages 14-15 we present scenarios
assuming £18/share acquisition price. A debt financed deal lifts EPS by 30% in
year 3, but InBev would likely have to use equity financing, giving a neutral EPS
impact in year 1, rising to ~10% EPS accretion thereafter (pre-synergies). If this
deal is to be believed it suggests SABMiller may present more upside than InBev.
An InBev & Bud combination offers limited true “synergies”, but the press
speculates that InBev can take $1.4bn cost out of Bud by 2011E. Assuming a $70
acquisition price and $1.2bn cost savings would enhance EPS by more than 30%
if debt financing is used. EPS enhancement reduces to around 20% if combined
with equity. ROIC will however only reach 6%, below WACC. See pages 7 to 11.
“Plan B”: SABMiller offers regional scale and growth
On paper this deal poses limited anti-competitive issues and offers regional scale
synergies, but seems largely hypothetical. On pages 14-15 we present scenarios
assuming £18/share acquisition price. A debt financed deal lifts EPS by 30% in
year 3, but InBev would likely have to use equity financing, giving a neutral EPS
impact in year 1, rising to ~10% EPS accretion thereafter (pre-synergies). If this
deal is to be believed it suggests SABMiller may present more upside than InBev.
PM:
Actually, this has the point I wanted to make – from Cazenove.
PM:
Brewing sector consolidation – InBev [INTB.BR, INB BB] €48.07 Stock – In-Line, Sector – Underweight & SABMiller [SAB.L; SAB LN] 1225p Stock – Outperform, Sector – Underweight
We see the reports from Friday and Saturday’s press (FT Alphaville website and Weekend FT respectively) as all but proving that InBev is serious about leading further consolidation within the brewing industry.
In the light of this our key recommendation is to buy SABMiller (SABM). We would avoid InBev for now.
We see the reports from Friday and Saturday’s press (FT Alphaville website and Weekend FT respectively) as all but proving that InBev is serious about leading further consolidation within the brewing industry.
In the light of this our key recommendation is to buy SABMiller (SABM). We would avoid InBev for now.
PM:
Implications for SABM
We suspect that the market will not initially push the SABM price up materially given that its participation in consolidation does not at this stage appear imminent or even particularly clear. However, buying SABM provides a free option on any involvement.
One does not have to have a definite view of how consolidation within the top tier of the brewing industry will occur to see that SABM, with its open shareholder register, is more likely to be on the receiving end than the family controlled companies.
Moreover, the mere possibility of SABM participating in consolidation may well lead to a reappraisal of its value given the strategic appeal of its assets, as happened with Scottish & Newcastle.
We suspect that the market will not initially push the SABM price up materially given that its participation in consolidation does not at this stage appear imminent or even particularly clear. However, buying SABM provides a free option on any involvement.
One does not have to have a definite view of how consolidation within the top tier of the brewing industry will occur to see that SABM, with its open shareholder register, is more likely to be on the receiving end than the family controlled companies.
Moreover, the mere possibility of SABM participating in consolidation may well lead to a reappraisal of its value given the strategic appeal of its assets, as happened with Scottish & Newcastle.
PM:
Implications for InBev
We would avoid InBev for now. We continue to see major obstacles to a deal between InBev and BUD, centring on the likely attitude of the Busch family. If InBev is determined to proceed regardless it could well involve paying a very substantial premium in a hostile offer.
We would avoid InBev for now. We continue to see major obstacles to a deal between InBev and BUD, centring on the likely attitude of the Busch family. If InBev is determined to proceed regardless it could well involve paying a very substantial premium in a hostile offer.
SJ:
So what is your point – that SAB offers a free option on any involvement in the consolidation process?
PM:
Yes – although this “free” option is more expensive that it was on Friday.
PM:
But not everyone likes the idea of InBev going for Anheuser.
PM:
This is from Jonathan Fell at Deutsche Bank
PM:
Focus on latest reports of InBev’s interest in bidding for Anheuser-Busch
We can see why InBev might be keen to diversify its exposure away from Latin
America, but are not convinced that a bid of $65 would be in shareholders’ best
interests. We think that it would be difficult for a deal at that price to generate an
attractive ROIC within a reasonable timeframe, even assuming challenging
synergy targets are met. We also worry that investors will focus on the low topline
growth potential of BUD’s US business. Total return potential is not attractive
enough to us at current levels (dividend cut is a concern, as is financing). Hold.
We can see why InBev might be keen to diversify its exposure away from Latin
America, but are not convinced that a bid of $65 would be in shareholders’ best
interests. We think that it would be difficult for a deal at that price to generate an
attractive ROIC within a reasonable timeframe, even assuming challenging
synergy targets are met. We also worry that investors will focus on the low topline
growth potential of BUD’s US business. Total return potential is not attractive
enough to us at current levels (dividend cut is a concern, as is financing). Hold.
PM:
Other concerns: financing and likely dividend cut
This would be a big deal by any standards and, if the bid is in cash, in order to
maintain an investment-grade credit rating we think InBev would have to do a very
large rights issue (€13-15bn). It is not clear whether the families which control
65% of InBev’s shares would be prepared or able to support the rights issue
themselves. And in order to pay down debt we also think that InBev would have to
reduce the 80% dividend payout ratio with which it surprised us in February.
Reported $1.4bn synergy number looks challenging but achievable
But our concern is more over whether the BUD business would be in a shape to
get top-line growth once these costs are taken out. Improving revenue growth
trends are not much in evidence in InBev’s existing mature market positions.
Valuation/risks: our DCF-based price target remains €55
Our key assumptions are a WACC of 9.8% (incorporating a levered beta of 0.9, net
debt / EV ratio of 15% and a risk-free rate of 6.25%), and a perpetuity growth rate
of 1.5%. Key risks to our recommendation and forecasts (upside and downside)
relate to economic growth and exchanges rates in emerging markets (especially
Latin America), and volume declines and competitive activity in InBev’s mature
markets. See page 10 for details of valuation/rsisk.
This would be a big deal by any standards and, if the bid is in cash, in order to
maintain an investment-grade credit rating we think InBev would have to do a very
large rights issue (€13-15bn). It is not clear whether the families which control
65% of InBev’s shares would be prepared or able to support the rights issue
themselves. And in order to pay down debt we also think that InBev would have to
reduce the 80% dividend payout ratio with which it surprised us in February.
Reported $1.4bn synergy number looks challenging but achievable
But our concern is more over whether the BUD business would be in a shape to
get top-line growth once these costs are taken out. Improving revenue growth
trends are not much in evidence in InBev’s existing mature market positions.
Valuation/risks: our DCF-based price target remains €55
Our key assumptions are a WACC of 9.8% (incorporating a levered beta of 0.9, net
debt / EV ratio of 15% and a risk-free rate of 6.25%), and a perpetuity growth rate
of 1.5%. Key risks to our recommendation and forecasts (upside and downside)
relate to economic growth and exchanges rates in emerging markets (especially
Latin America), and volume declines and competitive activity in InBev’s mature
markets. See page 10 for details of valuation/rsisk.
PM:
Ian Shackleton at Lehman Brothers likes it tho
PM:
Unsubstantiated press stories (FT Alphaville,
23 May 2008) continue to indicate the that InBev
remains focused on a possible combination with
Anheuser Busch (BUD). Although the reported
deal structure was for an outright bid at a premium
for BUD shares, we believe that the combination
would still present substantial upside for Inbev
shareholders. Our analysis below suggests the
deal structure would give a potential uplift in proforma
EPS of 14%; assuming a rerating of the
shares towards the US consumer captain average
could give a 48% increase in the share price to
around EUR 73, all else being equal.
23 May 2008) continue to indicate the that InBev
remains focused on a possible combination with
Anheuser Busch (BUD). Although the reported
deal structure was for an outright bid at a premium
for BUD shares, we believe that the combination
would still present substantial upside for Inbev
shareholders. Our analysis below suggests the
deal structure would give a potential uplift in proforma
EPS of 14%; assuming a rerating of the
shares towards the US consumer captain average
could give a 48% increase in the share price to
around EUR 73, all else being equal.
PM:
Summary