Being the only sober one at the party isn’t so bad. Consider SABMiller Plc. The London-listed brewer has so far sat out a veritable bacchanalia of bid activity.
First, Carlsberg A/S and Heineken NV bid for Scottish and Newcastle Plc. of the UK. Now Bud brewer Anheuser-Busch Inc. is reportedly talking to Belgium’s InBev. The latter combination would knock SAB off its perch as the world’s biggest brewer by volume. But the Miller owner shouldn’t fear a spell at number two.
SABMiller decided against a bid for Scottish and Newcastle on Wednesday, according to people familiar with the matter.
SAB has at times looked like the beer sector’s acquisition machine. It ponied up high prices for rivals Pilsner Urquell, Miller beer from Miller Brewing Co., Birra Peroni Internazionale and Royal Grolsch NV.
In November, SAB made a €816 million (Rs4,874 crore) bid for Dutch Grolsch, and announced a joint venture in the US with Molson Coors Brewing Co. to form MillerCoors. But thanks to deft cost-cutting, and a strong currency in South Africa, where SAB makes one-third of its profits, its shares rocketed—performing almost twice as well as the DJ World Consumer Goods index over the last five years.
But a seller’s market is no time to binge. Scottish and Newcastle squeezed more than 14 times this year’s forecast of Ebitda (earnings before interest, taxes, depreciation and amortization) from Carlsberg and Heineken.
That’s 50% more than SAB paid for Miller in 2002, in a deal which has yet to deliver a return on investment equivalent to its cost of capital. Anheuser, InBev’s putative quarry, trades on a frothy 12 times, and that doesn’t include a control premium.
The kind of deals that make sense for SAB could be even pricier. Carlsberg of Denmark and Mexico’s Femsa would strengthen SAB’s position in eastern Europe and South America, respectively.
But both shelter in the protective embrace of big shareholders who show no inclination to sell. Winning them over would most probably prove prohibitively expensive.
Investors, though, shouldn’t punish SAB for its reticence. Unlike spirits, where a few global brands reign supreme, the market for beer is more local, so sheer scale isn’t necessarily what counts.
Suds don’t travel too well, as SAB learnt the hard way by trying, and failing, to turn Miller into a global powerhouse. And rising input costs may yet soften the shareholding groups who control more rewarding targets. While rivals career towards morning-after hangovers, SAB would be wise to keep a sober head.