We are maintaining our fair value estimate for SABMiller following rumours that the global brewer is in talks to buy the beer business of FEMSA for $9 billion. This rumour supports our thesis that the brewer, which recently lost its number-one spot in the world after InBev bought Anheuser-Busch in 2008, is likely to make acquisitions to expand its scale. With a debt/capital ratio of 0.38 at the end of March and a market capitalisation of roughly $40 billion, SABMiller has the financial wherewithal to acquire FEMSA, and an acquisition makes strategic sense, in our opinion. SABMiller is noticeably absent from key Latin American markets like Mexico and Brazil, although it has operations in Colombia, Peru, Ecuador, Honduras, and El Salvador. Putting Mexico and Brazil in its fold would be a big driver of growth for SABMiller.
However, an acquisition of FEMSA would place SABMiller squarely against AmBev (67% market share) in Brazil and Grupo Modelo (55% market share) in Mexico, both of which have large ownership stakes by A-B InBev. This would put SABMiller head-to-head with its chief rival, especially in Brazil where AmBev is a fierce competitor. Above all, we are watching closely to see if SABMiller overpays. At the rumored $9 billion, SABMiller would be buying FEMSA's beer business at about 12.5 times trailing-12-month earnings before interest, taxes, depreciation, and amortisation. We think this is a fair multiple, but with brewer Heineken also rumoured to be in the running for FEMSA, there is a possibility of a bidding war. We would probably lower our fair value estimate at anything above 14 times, as we believe that would likely destroy value for SABMiller shareholders.
Ann Gilpin is a Morningstar stock analyst based in the United States.
