The resurgence in M&A activity here in the UK this year has been notable by the fact that we’ve already exceeded the activity we saw in the whole of 2014, and it has largely been driven by restless shareholders looking to increase returns and safeguard future profitability as well as revenue growth.
This pressure from shareholders to maintain returns and grow their respective businesses against a backdrop of a slowing global economy and increasing competition has seen a number of very high profile deals already this year, with the prospective Royal Dutch Shell (LONDON:RDSa) acquisition of BG Group (LONDON:BG) a case in point.
Sliding Oil and Gas prices have prompted a lot of speculation about prospective targets in the basic resource sector which suggests that while the Shell/BG Group is the most high profile story from this sector it probably won’t be the last.
Even so the slide in oil and gas prices seen since May has caused some to question the price tag of the $70bn deal at a time when forward energy prices are starting to be adjusted lower, and that’s before we even start to consider any regulatory concerns, which came to the fore this week when the Australian regulator queried the terms of the deal, despite it being approved by the EU Commission.
It would appear that the regulator has concerns that the LNG resources, which prompted Shell’s interest, might not be developed as quickly given that Shell already has a stake in a rival energy supplier Arrow Energy.
What has been notable has been the sheer size of some of these deals as companies look to increase their market share.
The last time we saw deal sizes of this magnitude was in 1998 and yet this week we got another potential deal buster with SABMillers revelation that they had been approached by sector peer ABInbev, the world’s largest brewer with a market cap of €151bn.
This isn’t the first time this particular deal has been mooted given the well documented problems of the global drinks sector with the same speculation doing the rounds just over a year ago. Since then we’ve also had speculation about a possible M&A involving Guinness and Johnnie Walker owner Diageo (LONDON:DGE) earlier this year, with speculation that 3G Capital, who have a 20% stake in ABInbev and owned by Brazil’s richest man, Jorge Lemann, might be interested in making a bid.
SABMiller (LONDON:SAB) is the world’s second biggest brewer behind ABInBev with a market cap of £47.8bn and it is notable that both companies are undergoing significant challenges to their abilities to grow their revenues, and profits, as craft beers become more popular, people drink more wine, spirits, and less mass produced beer, in the process eroding their market share.
It has been suggested that ABInBev is interested in SABMiller’s South African and Latin American businesses, where there is no overlap, between the two, but there is considerable overlap in the US, which could mean that both businesses may well have to offload some brands to satisfy regulatory concerns, while there may also be some regulatory intervention in China as well.
This is where the rationale for the deal starts to fall apart, given that both companies are struggling with declining sales and falling profits, as they look to consolidate their position in a market where revenues are in retreat, and profits are flat-lining, as craft beers become more popular.
If consumer drinking tastes are changing in the US, Europe and across the world surely it would make more sense to diversify your product offering towards wine and spirits, which would suggest that a bid for Diageo would make more sense, from a product diversification point of view.
While a tie-up in the companies would create a brewer that would dwarf its nearest competitors Heineken (LONDON:0O26) and Carlsberg (COP:CARLa), and in the process cut out overlapping costs between the two business saving money that way in the short term in the form of efficiencies, it won't solve longer term problems of products that aren't really that much different.
Furthermore it is not immediately clear how any deal would address the problem of changing consumer tastes and drinking habits and in that context it really doesn’t make sense to spend $75bn on more of the same, but time will tell as ABInBev has until the 14th October to firm up its interest, or leave it for another 12 months.
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