Anton Emmanuel's Blog

On scale alone, the colossal merger of beer giants Anhesuer-Busch (AB) and SABmiller warrants some appreciation. The $100 billion dollar transaction creates an unprecedented powerhouse in the global brewing market, one in which trumps its nearest competitor from a market share perspective by three fold.

Large-scale M&A deals have always fascinated me. The financials alone are staggering, but what’s even more interesting is the notion of such giant firms attempting to conflate their cultures. This said, although there are some aspects of the SABmiller acquisition that leave me puzzled, others seem fairly concrete, and point to larger trend in the M&A world; that is, businesses and financing agents alike are increasingly interested in pursuing large scale M&A — the very same M&A transactions that waned during the height of the financial crisis.

To provide context to this post, I want to point out a few very interesting facts that I noticed were imperative to the success of the SABmiller bid.

AB is backing its $100 billion bid through a $75 bridge loan, the largest loan of its type ever to be lent on global markets. Putting aside the the legal complexities, it’s important to note that underpinning such loans is the lender’s confidence in the debtor’s solvency. Solvency is not only related to the current state of business, but also in the strength of future cash flows. In essence, analysts at the lending banks must be confident in both AB’s strategy and in the future environment of the industry they operate in. The point I’m trying to reach is that ultimately, regardless of which way you look at it, the world of finance seems to boil down to the fundamentals of Present Value. In this case, even though AB’s capital structure points to a long term Net Debt to EBIDTA ratio of 2.0 (not necessarily worry-free) their strong credit rating coupled with confidence from lenders has secured the loan that makes this entire transaction possible.

On separate note, another aspect of the merger I found particularly interesting was a point raised by Jonny Forsynth, an analyst who examines the global drink industry. He states that ‘amidst the emergence of a Goliath-like megabrewers — smaller, more agile, craft brewers still do pose a significant threat.’

As we’ve discussed in COMM101 repeatedly, any successful business must have a strong value proposition. And at the root of strengthening any value proposition is: innovation.  I feel that if AB solely banks on its size, and tempers its innovative pursuits, the resulting complacency can have dire consequences.

Information was sourced from this article.