SABMiller share price: ABI working on plan to keep SAB’s Chinese business

Anheuser-Busch InBev will try to keep SABMiller Plc’s (LON:SAB)China beer business CR Snow, The Wall Street Journal has reported.

It was thought that AB InBev would seek to divest SAB’s stake in the business in order to secure approval from Chinese regulators for the £71-billion takeover of its South African rival. However, the WSJ yesterday cited unnamed sources who said that the world’s largest brewer would try to hold on to the stake, which could be the most strategic asset that SAB owns. Snow has enjoyed rapid sales growth over the past 25 years, benefitting from a sharp increase in beer consumption in China.

However, keeping the stake will not be easy and will largely depend on the outcome of talks that are reportedly taking place between ABI and China Resources, CR Snow’s majority holder with 51-percent stake. China Resources has the first option to buy out the stake and, according to one of The Journal’s sources, has already hired Nomura as an adviser. The investment bank has valued SAB’s stake at $3.6 billion.”
“China Resources is in the driver’s seat here,” said HSBC analyst Carlos Laboy, as quoted by The Journal. “It has to decide: Do we want to keep (AB InBev) as partners or try and buy back our equity stake at an attractive price?”
ABI will try to convince China Resources that both sides would benefit by consolidating, which would likely lead to an increase in prices in the People’s Republic. Currently, the heavily depressed beer prices in the country make it difficult for brewers to maintain profitability. SABMiller, for example, gets about two percent of its operating profit from CR Snow, a business that has a 30-percent market share in China, according to alcohol beverage consulting firm Seema International. China Resources reported a profit of $97.6 million from the business in 2014.
ABI, which commands 18 percent of the local market through its Budweiser and Harbin brands, would agree to remain as a minority holder in CR Snow if it receives operational control of the business, according to one of the sources cited by the WSJ. The source also said that in addition to expanding Budweiser’s distribution, the Belgian firm could cut costs and eventually boost CR Snow’s EBITDA to $1.5 billion.
Realising a plan for Snow is likely to take a long time because of the potentially tough negotiations with China Resources and the regulatory scrutiny surrounding the ABI-SAB merger.
“I imagine this transaction will receive very significant scrutiny because of its sheer size,” the WSJ quoted Ronan Harty, a partner at Davis, Polk & Wardwell LLP, who has experience with antitrust matters in China, as saying. “The (antitrust) review period itself can be extremely, extremely lengthy.”
In today’s trading, SABMiller shares were down 0.3 percent at 4,185.50p, as of 08:18 GMT. The stock has risen 2.8 percent since the start of the year and the company’s market capitalisation currently stands at £67.4 billion.
As of January 25, 2016, the consensus forecast amongst 27 polled investment analysts covering SABMiller had it that investors should hold their position in the company. The same consensus estimate has been maintained since November 13, 2015, when the sentiment of investment analysts deteriorated from “hold”.
As of 10:24 GMT, Thursday, 28 January, SABMiller plc share price is 4,199.50p.