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'I wouldn't dismiss it outright': Analyst sees logic in SAB Miller, Diageo merger

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By Ben Bouckley+

02-Jul-2014
Last updated the 02-Jul-2014 at 19:04 GMT

David Dennis/Flickr
David Dennis/Flickr

Whispers of a $171bn+ merger between Diageo and SAB Miller have led to share spikes for both companies over the past couple of days and follow chatter about SAB tying-up with AB InBev.

Speaking with BeverageDaily.com, Shore Capital analyst Phil Carroll said he "wouldn't dismiss it outright" when asked about a rumored £100m mega-merger between Diageo and SAB Miller.

Diageo shares soared to 1909.5p on Tuesday from a Monday high of 1878p; today they had fallen to 1,895p at the time of writing (1pm); SAB’s share price has risen steeply since Monday (3,371p high) to a current price of 3,409.

"But I don't think Diageo would want to be acquired by SAB. A little bit like SAB in regard to the rumors of a move from AB InBev - I think they'd like to be in control of their own destiny," Carroll said.

Despite struggles for key beer brand Guinness in established markets such as the US and EU, Diageo has always vaunted its beer business for the scale and distribution advantages it brings its spirits business.

'Guinness would do SAB Miller no harm whatsoever'

Carroll believes SAB, if say, it even targeted Diageo's beer business alone, would be attracted by Guinness as a premium global brand, given its limited portfolio in this area - SAB has Peroni, Pilsner Urquell and Miller, but ABI alone among its rivals has Budweiser, Beck's, Modelo and Leffe.

"A much broader premium portfolio that a brand like Guinness would bring would do SAB no harm whatsoever," Carroll said, "And it's kind of in a different category so it makes more strategic sense."

Diageo's presence in markets where SAB already exists would also - slightly counter-intuitively - appeal to SAB, Caroll said, since it would enable the beer giant to piggy back beer and spirits distribution together and effect cost savings.

Conversely, a move by ABI for SAB would work more upon the basis of geographic in-fill, the analyst said - given ABI's presence in Brazil, say, complementing SAB's big businesses in Colombia, Peru and Ecuador.

"So I can see why SAB would like Diageo," Carroll said. "But also culturally I think the personnel, and certainly the management, are quite different, and clearly some of them would go as a result of any merger or acquisition."

AB InBev move for Diageo very unlikely

Barclays Capital analysts say any deal could unlock £430m in synergy savings by distributing Guinness through SAB’s global network, and also allow SAB to rebuff any potential approach by ABI for either itself or Diageo – whose strong beer position in Africa could attract ABI.

But Carroll poured cold water on a possible ABI/Diageo tie-up, stating his belief that ABI is, "more interested in putting beer assets together and driving best practise, and for Diageo beer is only circa. 20% of sales".

Market chatter aside, Johnnie Walker and Smirnoff distiller Diageo already has its hands full integrating India’s United Spirits - not that that might deter SAB Miller from potentially springing a takeover bid.

India now one of Diageo's largest markets

Today saw Diageo announce the completion of its tender offer giving it a further 26% of India’s United Spirits to add to its existing 28.78% stake; the combined 54.78% cements its takeover.

“India has now become one of Diageo’s largest markets and will be a major contributor to our growth ambitions,” said Ivan Menezes, Diageo CEO, today of the UK plc’s £1.84bn purchase.

“USL is the leading player in the attractive Indian spirits market with great brands, a unique route to consumer and talented people,” he added.

“We can now combine that strong platform with Diageo’s strengths to create a compelling future in India for Diageo, USL and the Indian spirits industry,” Menezes said.

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