AB Inbev, SABMiller Reach Merger Deal In Principle: What's It Mean?

• After multiple offers, SABMiller plc SBMRY has finally agreed to a buyout by Anheuser Busch Inbev SA (ADR) BUD.
• Citi sees the potential for 13 percent EPS accretion for the combined company by year three.
• The market will likely not price in the full benefits of the deal immediately for fear that it will fall through.

After Anheuser Busch Inbev raised its bid for SABMiller for the fourth time, the two companies have finally agreed to a merger in principle.

What does the deal mean for shareholders of the two companies? A new report by Citi Research analyst Andrea Pistacchi tackles the terms of the deal and the outlook for the two stocks.

Terms
The terms of the deal are very similar to the terms of last week’s proposal. There is a cash offer of 44 pounds, or about $64 per share, for institutional investors or an alternate offer of a combination of both restricted shares and cash totaling a value of about 39 pounds, or about $59, for Altria Group Inc MO and BevCo.

Benefits
The biggest advantage that Pistacchi sees to the deal is the possibility for significant earnings accretion for the combined company. ”Based on the information we have and our assumptions on synergies ($1.6 bn), disposals (Miller Coors, Snow and Efes stakes) and cost of debt (3.5%), we estimate the deal could be ~13% EPS accretive in year 3,” he explains.

Shareholder outlook
For Anheuser Busch shareholders, Pistacchi expects that the combined company will produce up to 10 percent organic earnings growth in coming years. However, he also predicts that the stocks multiple will likely shrink from around 22x to about 19.5x post-deal.

For SABMiller shareholders, the benefits of a 44 pound offer are much more predictable. However, although Pistacchi expects a positive share price reaction, the fact that the deal is not yet official and its completion could still be months away will likely keep the stock trading well below the offer price for the time being.

Disclosure: the author holds no position in the stocks mentioned.