Markets may be plunging again ahead of the US jobs data - the FTSE 100 is currently down 1.6% - but that does not mean that takeover speculation has gone away.
Analysts at Nomura have looked at the drinks sector and examined the prospect of a merger between SABMiller and Guinness owner Diageo as way to overcome slowing growth. The bank said:
We see strong pressure on both Diageo and SABMiller management to create value for shareholders. In our [recent] SABMiller review we discussed potential benefits from a more entrepreneurial culture as well as margin upside from a tighter focus on costs. In our Diageo review we investigated ways to create value through spinning off businesses such as beer or Reserve Brands.
[But] would it be enough in a world in which forex and slower macroeconomic conditions are creating more headwinds for profit growth? A report in the UK press (Sunday Times, 29 August) that SABMiller has been consulting new advisors about a possible bid defence appears to show that the company feels under threat still from a bid from AB InBev; for Diageo, updating for forex moves last week, we now estimate slightly negative earnings per share growth this year in what was supposed to be a recovery year.
That made us think about SABGEO, a merger of equals of Diageo and SABMiller. Some 17 years on, we would see this as a similar move to the creation of Diageo from the merger of Guinness and Grand Metropolitan in 1998. We estimate that with around 50/50 emerging and mature market split of profits, a merged group could offer a firmer profit base in uncertain times (for SABMiller holders) and potentially increase its growth profile in the longer term (for Diageo holders).
Although Diageo is now making less of its total beverage alcohol strategy, we believe that a more balanced portfolio of beer and spirits could produce material upside. With broadly similar market capitalisations, we see such a deal adding 18% to combined net profits, assuming £1bn of cost synergies and some benefit on tax, with minimal regulatory issues to subtract value. There is potentially further upside from revenue synergies, and scope for a higher rating for a better balanced business. In addition, for the two large shareholders in SABMiller (Altria and Santo Domingo families), we believe a merger would preserve their tax status while giving smaller shareholdings in a more liquid investment.
But despite this suggestion, in a falling market SABMiller is down 39p at £30 and Diageo has dropped 14.5p to £16.99.
