Altria’s Stake Options in the Potential ABI-SABMiller Deal

Anheuser-Busch InBev - SABMiller: A New Beer Brew in the Offing?

(Continued from Prior Part)

Altria’s returns from the investment in SABMiller

The estimated fair value of Altria’s (MO) investment in SABMiller (SBMRY) (SAB.L) was $22.1 billion as of June 15, 2015—up 550% from $3.4 billion in July 2004. Earnings from SABMiller grew at a CAGR (compounded annual growth rate) of 11% over the period 2009–14. Altria Group (MO) derived over $1 billion in pre-tax income from its investment in 2014.

Altria management’s take

Speaking at the company’s investor day in June 2015, Altria Chief Financial Officer Billy Gifford said, “Our goal always has been—and remains—to manage this investment in a way that delivers the best value for Altria’s shareholders.”

In the event of an acquisition, Altria may also elect to keep its stake in SABMiller. The investment has appreciated at a CAGR of 15.5% between July 2002 to June 2015—not counting annual dividends from the investment.

The income impact

SABMilleris expected to payout ~51% of earnings by way of dividends in fiscal 2016, while Anheuser-Busch InBev (BUD) (AHBIF) (ABI.BR) is expected to pay out about 65.8%. In this scenario, keeping its investment in SABMiller may appear to be a better deal for Altria, particularly in view of the uncertain environment in the tobacco industry.

In the event a deal does come about, Altria can look forward to higher future payouts from NewCo, despite the short-term risk of lower dividends. This looks plausible if synergies, which could be as much as $2 billion or more, are realized from the deal.

If an acquisition does not come through, then Altria can keep receiving the high cash flows from SABMiller, as it has been in the past. SABMiller has a very strong market position in the growing beer profit pools of China, Africa, and parts of Latin America. It’s actually the number one brewer in most of these markets, so the future potential for cash flows is bright.

A third option for Altria may be to have a private sale to ABI, in the event that it decides the price is high enough.

Altria makes up 1.3% of the portfolio holdings in the iShares Select Dividend ETF (DVY) and 0.6% of the holdings in the SPDR S&P 500 ETF (SPY).

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - A Beer-Fueled Courtship: Anheuser-Busch InBev Announces Plans to Acquire SABMiller

• Part 2 - The Proposed ABI-SABMiller Deal: Will Market Concentration Rise?

• Part 3 - Anheuser-Busch InBev’s Acquisition of SABMiller: Divestitures at a Glance