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Hidden strength

11 November 2015 By Robert Cole

Anheuser-Busch InBev is being way too coy about the upside in its $100-plus billion offer to buy SABMiller. The number that matters most in the Budweiser brewer’s plan unveiled on Nov. 11 is its estimate of the cost savings, which AB InBev pegs at around $1.4 billion a year. It’s low, verging on the implausible.

The tie-up will generate savings from procurement, efficiency and the like, of around 9 percent of the revenue SABMiller generated last year from businesses it controls. In other words, excluding things like the MillerCoors joint venture it just said it would sell out of, and its stake in China’s Snow. That’s at the bottom of a range, based on comparable deals, outlined by Bernstein in a Sept. 17 research note. It is less than half the gain, expressed as a percentage, AB InBev snaffled with its purchase of Modelo.

Investors, if they believed that, would be frantic. The synergy gains look paltry against the premium AB InBev is paying to SAB shareholders, and even smaller given the increase in the companies’ market values over the two-month bid process. Taxed at the two companies’ blended 23 percent rate, and capitalised on a multiple of ten, that $1.4 billion of synergies is worth around $10 billion in today’s money. Since the cost savings will take up to four years to come through, the real value today is more like $7.5 billion.

Yet around $50 billion has been added to the combined equity value of AB InBev and SAB since the mooted takeover plan became public. Strip out the movement in exchange rates, and it’s closer to $60 billion. Investors seem to think that the cost savings will be much higher – or that one enormous brewer will sell far more beer than two merely gigantic ones.

Buyers often under-promise so as to please investors later by over-delivering. Grand claims of value creation by AB InBev might raise alarm among SAB shareholders – who will mostly get cash – antitrust regulators and accountants. Extra cost savings could come from cost-cutting on non-controlled joint ventures in the SAB stable. Still, there is a big gap between what the company forecasts and what the market says. That suggests AB InBev is only telling half the story.



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