Everything you need to know about the SABMiller and AB InBev deal: What happens next?

 
Madeline Ratcliffe
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There are many questions around the future of the potential takeover (Source: Getty)

SABMiller's board has given a conditional nod to AB InBev's cash offer of £44 a share, with a partial share consideration of AB InBev shares for stakeholders Altria and BevCo to reduce their tax liabilities.

The London-listed brewer has also given its approval to move the deadline for a firm offer back to 5pm on 28 October.

Given the $3bn break-fee if SABMiller back out now, it's likely that this one will run.

Now the £68bn 'megabrew' merger has been agreed in principle and is set to be the biggest takeover of a British company in history, what comes next?

Savings

Anheuser-Busch InBev could be looking to make savings of as much as $2.5bn from the combined brewer if its potential takeover of SABMiller goes ahead.

Read more: SABMiller share price jumps

AB InBev has a 'hard culture' and a record of making 'aggressive savings' as one analyst puts it, and this deal is no exception.

The brewers' shared markets in Europe and the US offer plenty of chances for the AB InBev board to roll up their sleeves and make savings, from cutting down on first-class travel and printing allowances, to job cuts.

While AB InBev remained tight-lipped about where any future savings might fall, analysts have pointed to cutting down on joint procurement costs, reducing the cost of raw materials such as glass, plastic, cardboard, and ingredients like hops and barley.

Bernstein analyst Trevor Stirling points to the 'frugal' culture of AB InBev, whose chief executive Carlos Brito is proud of flying economy, and opportunities for shared brewing facilities and transport costs, not to mention there would no longer be a need for two sets of head-quarters and two boards to remunerate.

Canaccord Genuity is one of the brokers that thinks AB InBev could make around $2bn of savings from SAB over a three year period, building up from $837m in the first 12 months.

This would be boosted by the sale of assets to satisfy antitrust regulators, suggesting the sale of SAB's Miller Coors stake in America could fetch as much as $9bn.

Brazilian fund 3G, which controls a 22.7 per cent stake in AB InBev, previously faced criticism over its aggressive cost-cutting tactics, including the axing of 7,000 jobs within 18 months of taking over Heinz in 2013.

Bernstein's Stirling was keen to point out the differences between the two and said 3G and AB InBev were completely different entities, and AB has many more years of experience in making efficiency savings.

And Barclays analysts have pointed to problems, suggesting a more moderate $1.8bn of savings to be made in the short-term, which includes SAB's in-house cost-cutting target of over $1bn by 2020, which it announced on Friday.

Barclays has said that AB InBev's zero-based budgeting approach (a system of expense-planning where every cost needs to be justified, starting from a blank sheet of paper each quarter) and “ruthless cost control mantra”, won't work as well in Africa, where AB InBev has no footprint, and where the smaller scale and nature of the less developed markets mean brewing costs are structurally higher

Competition issues

The deal would combine the world’s two largest brewers, and one in every three pints poured would be from their combined brewery house. Obviously, regulators will have some questions over competition.

The US Department of Justice would almost certainly insist on the disposal of SAB's stake in Miller Coors in the USA, as between SAB's Miller Coors brands and AB InBev's Budweiser operations the market would be swamped.

It is likely that Miller's partner Molson Coors would be keen to snap up the stake and consolidate its holding, although analysts at Canaccord Genuity also think Heineken might also be an interested buyer.

Read more: US Justice department launches antitrust probe into AB InBev

Although SABMiller and AB InBev own some of Europe, and the world’s, most recognisable beer brands, from Stella and Becks to Peroni and Grolsch, it is not expected that there'll be any competition issues here.

The other major disposal most analysts think likely is in China, where SABMiller owns a 49 per cent stake in CR Snow in China - the world’s single largest beer brand - along with China Resources Enterprises (CRE), a state run holding. It’s possible SAB would have to sell its Snow stake post merger to satisfy Chinese regulators, which would probably be bought back by CRE.

Both rivals have a multitude of South American brands including InBev’s original brand, Brahma in Brazil, although there’s little overlap as the companies largely operate in separate countries.

SAB has a very established presence in Africa, and South African-based Castle which is sold everywhere. InBev has almost no presence, and their complementary presence across emerging markets is one of the main motivations for the deal.

Some analysts have wondered whether Castle may be one of the sell-offs, which would be a complicated operation involving multiple African governments, but it's less likely than the rest.

The other potential issue arises from the companies' interests in rivals Coca-Cola and Pepsi. SABMiller joined forces with Coca-Cola last November to create a new bottling company, Coca-Cola Beverages Africa, in which it holds a 57 per cent stake.

Meanwhile InBev also has a distribution deal with Pepsi in Brazil. Analysts are divided as to whether the control of bottling for rivals Coca Cola and Pepsi, albeit on different continents, will force AB InBev to end the relationship or not.

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