See if you can follow this logic. Anheuser-Busch InBev (BUD) — a global megabrewer that has struggled to grow in recent years due to a shift in consumer preferences to craft brews — is reportedly making an offer for its biggest megabrewer competitor, SABMiller (SBMRY) … which, like BUD, has also had a hard time generating growth of late.
Both stocks soared on the news, despite the fact that there is virtually zero percent probability that U.S. antitrust regulators will let it happen without some major divestments. BUD finished the day up nearly 7% and SBMRY finished the day up nearly 21%.
Normally in a major merger announcement, the stock price of the firm being acquired soars while the buyer’s stock price tanks. It’s generally understood that the buyer is overpaying for synergies that never materialize or ultimately take years to materialize.
But so desperate are Big Beer investors for a growth story, that they send the prices of both acquirer and acquiree sharply higher. And that’s not where it stops.
Molson Coors Brewing Company (TAP) was up over 14% on Wednesday despite not even being directly involved. Molson Coors is partnered with SABMiller in a 50-50 joint venture, MillerCoors, to jointly market Miller Lite, Coors Light and other brands domestically here in the United States.
This is where it gets interesting.
If a combined BUD-SBMRY were forced to divest its U.S. operations, TAP would be first in line to buy out its partner in the Miller-Coors merger. The thinking is that Molson Coors, free and running the show by itself, will be able to cut costs and boost profits. The recent history of Constellation Brands (STZ) — in which control of the Grupo Modelo brands Corona and Negra Modelo transformed the sleepy wine merchant into a fast-growing premium beer brewer — would seem to suggest it can be done.
But there are two major flaws with this argument.
To start, Coors Light isn’t Corona. It’s a moribund domestic beer brand favored by middle-aged blue-collar white men — a demographic in slow decline. It’s hard to see how Molson Coors will suddenly take a portfolio of struggling brands and suddenly make them cool again.
Yes, there is the possibility of higher profits due to cost cutting. But then, that was the entire purpose of the 2007 joint venture to begin with. Miller and Coors combined forces to enhance their competitive position in the U.S. market.
One would think the easy money has already been made.
The second flaw is more philosophical. What exactly is the point of paying a massive premium to buy out your competitor, only to immediately turn around and sell its parts piecemeal? I understand that SABMiller has market share in parts of the growth where InBev is currently weak, such as Africa. I’ve written before that Africa is the last investment frontier, and I’ve specifically recommended SBMRY as a long-term play on the rise of the African consumer.
But paying a premium to buy out SABMiller for its African exposure to then potentially dump its American assets at fire-sale prices would seem like an odd strategy.
And that’s assuming the U.S. regulators let it happen at all, which — as I wrote this time last year when rumors started circulating — isn’t likely.
Is There a Trade Here?
On the long side, probably not. But there might be a decent short opportunity.
When the rumors of a BUD takeover of SABMiller broke down last year, the price of SBMRY tumbled from about $62 to about $50 in the span of about two weeks.
The way I look at it is this: If the deal happens, it’s probably already priced in, or at least mostly so. So there is not a lot of upside. But if the deal falls through — and I expect that it will — SABMiller’s stock price will come crashing right back down to earth. So shorting SABMiller would seem like a relatively safe bet.
And while you’re at it, short BUD too. It trades hands at 21 times next year’s expected earnings, which is a high price tag for what has become a slow-growth company.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
