Why Merrill Lynch Sees Anheuser-Busch InBev Worth Even More

With a SAB merger now closer, Merrill Lynch issued a Newco model for what to expect ahead. The most obvious benefit was that the firm’s price objective went from 115 euro up to 122 euro — all versus 100 euro currently. Monday’s report said:

We believe Anheuser-Busch InBev would likely pay 16.8-times EBITDA and 13.2-times post synergies. We believe that “Newco” would be able to grow EPS faster than peers via a broader brand portfolio, improved geographical balance (and higher overall exposure to emerging markets), cost synergies and of course optimal balance sheet leverage and tax benefits.

What stands out in the report is that this is generally considered a  minimum long-term value creation view, which means that there is an implied upside potential above and beyond that. Merrill Lynch’s pro-forma model yields and earnings per share enhancement of 4% in 2016, but that enhancement will grow to 7% in 2017 and 13% in 2018 — and that assumes that 2016 is 6-month consolidation only.

Another assumption is disposal proceeds of $15.3 billion for SAB’s 49% stake in CRE and the 58% ownership of Miller Coors joint venture. Its forecast consolidated annual growth rate for earnings per share is 10% for 2016 to 2018.

There is a negative side of the deal, and that is that the report sees a lower dividend payout ratio from an estimated 65% to 45%, due to a likely emphasis on growth.

Upside opportunities include potential cost savings, superior price/mix opportunities, and upside to working capital and tax ratios. The main potential risks are a greater than expected deterioration in emerging markets, what could be “value leakage on disposals,” the future state of investment grade bond markets, management retention, and the continuation of Coca-Cola and Pepsi bottling agreements and the Castel relationship in Africa.