Heineken rejection of SABMiller offer sparks speculation of bigger beer battle ahead

Financial Post

Nicolas Van Praet

Sep 16, 2014

MONTREAL • Heineken NV’s confirmation Monday it rejected a takeover approach by U.K. beer maker SABMiller plc has ignited another wave of merger speculation as the world’s remaining big brewers jostle to get even bigger.
Analysts believe Molson Coors Brewing Co. may step in to pick up assets that are divested to satisfy anti-trust concerns. The company isn’t seen as a top acquisition target itself, in part because the company’s founding Molson and Coors families have voting control of the brewer and its presence outside North America remains limited.
Molson shares buzzed up as much as 8.3% Monday on the New York Stock Exchange, their biggest intraday gain since May 2009. The stock has climbed roughly 40% since January, when SABMiller chief executive Allan Clark set tongues wagging with a comment that the case could be made for a SABMiller merger with Anheuser-Busch InBev NV, the maker of Stella Artois and Budweiser.
“What you’re starting to see is the last stages” of the global consolidation of beer making, Michael Bellas, chairman and chief executive of Beverage Marketing Corp., told CBNC Monday. “[It's] the global consolidators consolidating.”
Amsterdam-based Heineken confirmed Sunday it has been approached by SABMiller regarding a potential acquisition of Heineken. The family that controls the Dutch brewer rejected the approach.
The development has renewed market chatter that the real end game for Belgium-based AB InBev (ABI) is buying SABMiller.
“SAB’s approach to Heineken could accelerate ABI’s timeline for a bid for SAB,” analysts Robert Ottenstein and Eric Serotta of New York City-based International Strategy & Investment Group said in a note. “We do believe it’s likely that SABMiller’s board expects an approach by ABI in the foreseeable future (and may already have had a soft approach) and that they are exploring all strategic options, as per their fiduciary duty.”
If that deal were to happen, regulators would force the combined company to shed some assets in the United States, analysts said. And perhaps the easiest way for the newly merged company to deal with that is to sell SABMiller’s stake in its U.S. joint venture with Molson Coors, called MillerCoors.
MillerCoors was born in 2008, the result of a move by their parent companies to join forces against rival ABI in the highly-competitive U.S. market. The venture gave the two partners more scale and allowed them to significantly cut costs.
Under the deal, SABMiller has a 58% economic interest in the joint venture and Molson Coors has 42%. Voting interest is equal.
With a change of control, Molson Coors would be in a strong position with ABI to negotiate for the stake it doesn’t own, according to analysts Mr. Ottenstein and Mr. Serotta. They argue a transaction at 10 times estimated earnings before interest, taxes, depreciation and amortization for fiscal 2014 “would be highly accretive” for Molson Coors, even if it has to issue equity to finance a portion of the estimated US$9.8-billion purchase price.
“There is a long way to go before this situation gets to the point where Molson Coors will benefit,” Don Bilson, an analyst with Gordon Haskett Research, said in a note. “But this party finally looks like it is getting started and we like the prospects for Molson Coors.”
A standstill clause contained in the MillerCoors joint venture operating agreement states that the partners have agreed that neither will seek to acquire ownership or control of the other until 10 years after closing of the deal, namely 2018. But that doesn’t prevent them from talking about such a formal tie-up as long as they keep such conversations private.
“We continue to believe Molson Coors would be the best fit for SAB,” Credit Suisse analyst Sanjeet Aujla said in a research note.
Bloomberg data shows global brewing mergers and acquisitions have totaled US$90-billion since 2008, slowing to US$5.5-billion last year. ABI has moved quickest in gobbling up rivals, doing close to US$100-billion worth of acquisitions over the past decade.