Is Diageo plc Now A Takeover Target?

SABMiller is the FTSE 100‘s biggest gainer today, after it emerged that the group had made an offer to acquire Heineken. It’s widely speculated that this offer was made to fend off an offer from SAB’s much larger peer, Anheuser Busch Inbev SA. Indeed, it has emerged within the past few hours, that AB InBev could be talking to banks about arranging roughly £75bn of financing to acquire SAB. 

However, this move by Ab InBev could mean that Diageo (LSE: DGE) (NYSE: DEO.US)  is now a possible takeover target. 

Escaping a takeover

The City has been speculating about the possibility of a deal between SAB and AB InBev for around a decade now, and it seems as if a deal is finally being discussed. 

Nevertheless, SAB has made it clear that the group does not want to be swallowed by its larger peer. As a result, the company is trying to make itself too big to acquire. With the Heineken offer dead in the water, SAB only has a few options remaining, one of which is a merger with Diageo.

A deal between Diageo and SAB is not recent news; in fact analysts at Barclays produced an interesting report on the prospective deal earlier this year. Barclays’ analysts estimated that a tie-up of the two beverage giants would create a $170bn business, with annual free cash flow of approximately $8.5bn. What’s more, the combined group could save more than $700m per annum by combining global distribution networks.

Merger, not takeover

Unfortunately, Diageo is not an easy target for SAB, partly due to the fact that Diageo has a market capitalisation of just under £47bn, compared to SAB’s £62bn. It’s likely that SAB would have to offer at least a 20% premium for Diageo’s shares, putting a price tag of around £56bn on the world’s largest spirits maker. 

With this being the case, SAB and Diageo would have to undertake a merger of equals, the terms of which would take months to thrash out. Still, there is scope for the deal to go ahead, SAB has made it clear that the company does not want to be taken over by AB InBev, so a rushed merger of equals with Diageo may be the only alternative. 

Whatever the outcome, it’s likely that investor will benefit as cost savings are driven through, profit margins widen and profits surge higher. 

Another option 

Another option analysts have discussed involves the sale of Diageo’s beer business to SAB. 

Diageo’s beer brands accounted for approximately 20% of net sales last year and the company’s brand collection includes Guinness, the famous Jamaican lager Red Stripe and Kenya’s national beer brand Tusker. City analysts believe that the sale of this business by Diageo to SAB could net Diageo enough cash to buy back 10% of its shares, or return a hefty chunk of cash to investors via special dividend.

Still a great company 

Whatever course of action Diageo and SAB decide to take, one thing is for sure, Diageo’s defensive nature means that the company is a great investment for you to tuck away in your retirement portfolio and forget about.