Altria (MO) may be finally cashing in on its “hidden” assets that we have been highlighting for some time. The company owns a 27% stake in SABMiller (SBMRY), and its shares are receiving a nice bump as a result of increased merger talks surrounding the brewer after speculation began early September 15.
Rumors have been swirling for some time around beer giants AB-InBev (BUD) and SABMiller, but this time the news is coming from the two companies themselves. The acquisition, which has been intimated to be in the works, would be the largest in the industry’s history and would create a company that produces approximately one third of the world’s beer. No proposal has been received, but AB-InBev reportedly plans to work directly with SABMiller to work “toward a recommended transaction.”
In order for the proposed transaction to pass anti-trust regulations, material divestitures will be necessary. Both SABMiller and AB-InBev have significant market share in the US and China, which is where the majority of the divestitures will take place. SABMiller’s market share in the US comes via its joint venture with Molson Coors, a likely suitor for those assets. The joint-venture recently announced the planned closing of one of its seven breweries in the US due to pressure on mass domestic volumes in the country.
The recent heating-up of merger talks is likely due to a variety of factors. The slowdown in consumption of macro brews across the western world has led to significant consolidation in recent years and is how the two companies in talks have reached their current sizes. The continued popularity of craft brews has led the firms to look to consolidation for growth and to drive efficiencies across operations. A similar situation is happening in the two formerly high-growth markets of China and Brazil, where economic pressure will likely lead to lessened consumer discretionary spending, driving beer consumption lower.
Further sweetening the timing of the deal is the nearly 20% drop in SABMiller shares thus far in 2015. A deal will likely come at a significant premium to SABMiller’s Tuesday closing price, which is how Altria will reap the benefits of its position in SABMiller. We may have one family alone to thank for the proposed merger talks and corresponding gains in Altria shares, however. Last fall, Heineken rejected a takeover offer from SABMiller, as the Heineken family that controls the destiny of the Dutch brewer said the proposal was “non-actionable.” Their desire to remain independent has left the door open for AB-InBev to acquire SABMiller, and SABMiller’s efforts to remain independent may very well prove to be fruitless.
Assuming a deal is consummated at a significant mark-up to SABMiller’s existing price, both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are poised to benefit, as both include Altria as one of their top holdings. A transaction may not come to fruition until well into 2016, but a deal between the beer giants has become increasingly probable. Altria shareholders should expect a solid return on the firm’s investment in SABMiller, though the magnitude of the upside potential depends in part on the construct, terms, and tax implications of the deal with AB-Inbev, all of which are uncertain at this point.
Beverages – Alcoholic: BF.B, BUD, SAM, BORN, CCU, STZ, DEO, FMX, TAP