Glenboden M & A Originations

Options for SABMiller after Heineken's purchase of FEMSA

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Origination Status acquisition announcement, January 2010
Asset FEMSA Cerveza (Mexico), no.2 domestic beer producer
Buyer Heineken NV (Holland), global no.2 beer producer
Seller FEMSA CV (Mexico), leading domestic soft drinks, retail and beer group
Buyer Rationale no.2 market position in Mexico, transformation in Americas, global consolidation, brands
Seller Rationale 20% stake in global no.2 brewer, focus on soft drinks and retail businesses
NBs SABMiller was also in the race to acquire FEMSA Cerveza
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After this superb acquisition by Heineken, SABMiller has fallen even further behind its main rivals, InBev and Heineken, in the global beer consolidation race. Roughly, the last two years have seen SAB drop from global no.1 to no.3 in revenue terms. Surely it's urgent now for SAB to acquire a major international group; candidates include Molson, Foster's and Efes.

Deal brings brands and geographies to Heineken ...FEMSA looks like a dream acquisition for Heineken. The group has gained the no.2 market position in Mexico, and a platform in the Brazilian market. Those countries are described by the group, respectively, as the fourth and second largest 'profit pools' in global beer.

In addition, FEMSA brings two ambassador brands of Mexican beer, Dos Equis and Sol; double-digit growth in exports in 2009, to the US and beyond, testify to their strength.

... and is financially soundOn top of that, FEMSA delivers strong financials (see profile). Given that the deal was shares -only, and the fact that the net debt ratio of the acquired business is the same as that of Heineken, the group is able, post -transaction, to keep its own ratio to just over x3 EBITDA.

Plus the valuation is attractive, at only x11 EBITDA; the economic value of the Heineken shares is clearly higher than the equivalent amount in cash, to FEMSA (about 10% higher by our estimate).

SABMiller fallen behind in global consolidation ...In the last two years, Heineken has co-acquired Scottish & Newcastle in Europe, and now FEMSA Cerveza in Latin America. Meanwhile, InBev has merged with Anheuser-Busch in the US. By comparison, SAB's last mega -merger was with Miller in the US, as far back as 2002.

It's not as though SAB has been inactive in M&A, in that time; only the deals have been relatively small and national or regional, in Zambia, China, Russia, Romania and Ukraine (Sarmat). The one exception was Grolsch, purchased in 2007, but that was rather a premium brand internationalisation play.

... has the financial muscle for a big mergerSAB has the balance sheet strength for a big deal. The group's net debt ratio at y/e FY 2009 was just over x2 EBITDA; for it to increase to Heineken's level of x3, SAB would have the warchest to make a cash acquisition of nearly € 3 bln.

Molson isn't globally scalableThe most low-hanging candidate is Molson Coors; market leader in Canada, no.2 in the US with 30% share, and significant in the UK. That group would add nearly € 2 bln in revenue to SAB, allowing it to catch up with Heineken in the global league.

On the other hand, SAB already controls the biggest part of Molson, through its 60% holding in MillerCoors in the US. Besides which, that group is in decline in volume terms, has limited exposure to developing markets, and its main brands are nationally -restricted (Molson in Canada, Coors in the US, Carling in Britain).

Foster's is global and a ripening candidate ...Foster's is arguably a better option for SAB, given that brand's strong international presence, as the ambassador of Australian lifestyle; not to mention that group's no.1 position in the Australian market, with over 50% share.

SABMiller has been courting Foster's for some time. Since 1993, Miller has been the marketing and sales partner for Foster's in the US, taking over the brewing rights also in that market in 2007. Plus, in 2006, SAB acquired all of Foster's assets in India, including the licence for the brand.

In addition, SAB has been trying hard to break into the Australian market, a duopoly between Foster's and Lion Nathan, by acquiring the minor Bluetongue brand in 2007, and building a new brewery through Pacific Beverages, its joint-venture in that market with Coca-Cola.

... succeeding in its wine transformationThwarting such a takeover is Foster's troubled wine business, which makes up around 40% of that group's € 3 bln in sales revenue.

On the other hand, wine is now profitable again for Foster's, and its 'tail brands' have been parked in a joint venture managed by Vok Beverages. So SAB might acquire Foster's, and take its time over divesting the wine portfolio.

Efes enjoys favourable demographics ...Finally we turn to Anadolu Efes. For some time Glenboden has tipped that business as a consolidation candidate, given the financial burden of its expansion in Eurasia, and the way it's milking its 85% market share in Turkey, through a staggering 45% EBITDA margin, in order to fund that.

Efes is not only the near -monopolist in Turkey; it's also the no.4 player in Russia, with 5 -10% market share, and a leading or major player in other countries in that region, namely Kazakhstan, Serbia, Moldova and Georgia.

In fact EBI, Efes' non -Turkey business, has started to break even, after financing costs, in Q3 2009, and has an EBITDA margin of over 20%, making the group more attractive as an acquisition candidate.

Overall, the Efes group would bring nearly € 1,5 bln of incremental revenue to SAB, in developing Eurasian countries with favourable demographics.

... but in Heineken's sights alsoThere's a major negative here for SAB, however. Having run out of its own M&A steam in recent years, Efes created a joint-venture in 2008, to enter the Uzbekistan market and to pool assets in Kazakhstan and Serbia. The partner ? Heineken.

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THIS LEAD'S VALUATION
Size (€ mln) 5.300
Sector beer
Asset Quality Mexico no.2 branded
Seller large plc
Buyer large plc
P/S 2,5
P/Ebitda 10,9
Type enterprise value (share deal)
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