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AB InBev Moves Closer to Sealing SABMiller Deal

The asset swap with Ambev should be beneficial to moats and margins.

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 Anheuser-Busch InBev (BUD)/(ABI) answered one of the final outstanding questions regarding its acquisition of  SABMiller (SBMRY)/(SAB) with the announcement that it will enter into an asset swap with  Ambev (ABEV)/(ABEV3) to distribute SAB's Latin American assets. Subject to the closure of the transaction, AB InBev will transfer SAB's Panamanian business to Ambev; in exchange, Ambev will transfer to AB InBev its businesses in Colombia, Peru, and Ecuador.

This distribution of the Latin American businesses across the two firms is something of a surprise to us. We had expected SABMiller's Latin American business to be transferred in its entirety to Ambev, with AB InBev taking a higher equity stake in Ambev. Nevertheless, we believe this asset swap is neutral to our valuation and our wide economic moat rating for AB InBev, which is ultimately left with monopolistic control over some growing and premiumizing Latin American markets. We are reiterating our $126 and EUR 111 fair value estimates for AB InBev's ADRs and ordinary shares, respectively, as well as our $5 and BRL 20 fair value estimates for Ambev.

With this deal, AB InBev is transferring to Ambev a high-volume but stagnating business; in return, it is receiving businesses that represent lower total volume than Panama but have solid growth rates, low current per capita consumption, and opportunities to premiumize. These deals will give AB InBev full control over some monopolies in a region that boasts some of the most profitable beer markets in the world. EBIT margins tend to be around 40% in Latin America, supported by the dominance of either Ambev or SABMiller. Where one is the market leader, the other usually has a small share. The combination of those shares to create one dominant player in each market is likely to damp competitive friction, which we believe will be positive for pricing power, margins, and the competitive advantages of both AB InBev and Ambev in the region.

SABMiller has a volume share of around 70% in Panama, but volume in the year ended March 31 fell 16%, driven by an excise duty increase at the beginning of the fiscal year and increased competition. Panama is one of the smaller Latin American markets, at around 3 million hectoliters a year, despite per capita consumption in line with developed markets, at 90 liters per year.

In Colombia, Ecuador, and Peru, SABMiller is dominant, with market shares around 90%. The assets being transferred to AB InBev by Ambev, therefore, are minority market shares, but when combined with the SABMiller assets, they will make AB InBev essentially the only major operator in those countries. In aggregate, we estimate the volume represents only 75% of that in SAB's Panama business. Colombia and Peru, however, are experiencing healthy growth, with beverage volume up 8% and 11%, respectively, in the past fiscal year. Both markets benefited from positive pricing to the tune of 3%. Although volume in Ecuador declined 2%, we believe this is cyclical in nature and the long-term trends are fairly healthy. Per capita consumption in all three markets is around 40 liters per year, slightly below average in Latin America, creating a long-run opportunity for per capita consumption growth and, in Ecuador and Peru, continued premiumization.

Progress toward the completion of the SABMiller acquisition has been steady, with several major hurdles now cleared. Most recently, AB InBev confirmed it reached an agreement with the South African government to approve the deal, and we think the asset sales in Europe will help ease the deal past the European Commission's antitrust scrutiny. Assuming the Castel family does not cause any wrinkles as a result of the change of ownership of SABMiller, we think this asset swap is one of the final pieces of the jigsaw puzzle that is this complex deal. Management has said the deal is likely to close in the second half of this year, and we believe this announcement keeps the deal on track with that timeline.

In our view, these deals also answer investors' long-standing question relating to AB InBev's economic interest in Ambev. If AB InBev had wanted to take full control of Ambev, folding SABMiller's Latin American business into Ambev would have given it an ideal opportunity to do so. Under such a structure, AB InBev would have had opportunities to remove duplicate costs across the Latin American business and further raise some of the highest margins in any global consumer staples market. While we still believe this will happen eventually, we now believe such a transaction is unlikely until SABMiller is fully integrated over the next few years.

Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.