After falling to its lowest point in nearly two months late last week, Diageo’s share price has enjoyed a bounce amid rumors of a potential merger between itself and SABMiller. At mid-day today, Diageo’s shares were trading at approximately £18.75 ($31.88) on the London Stock Exchange, about 2.5% above their price when the market closed last Thursday.
Talk of a union between Diageo and SABMiller follows weeks of speculation that A-B InBev has been exploring an acquisition of SABMiller that would bring together the world’s two biggest brewers. A union between SABMiller and Diageo, meanwhile, would create a £100 billion ($170b) drinks behemoth that would generate an estimated £5 billion ($8.5b) in yearly pre-dividend free cash flow. The combined company would have the world’s strongest premium drinks portfolio, and while A-B InBev would still be the biggest brewer in terms of global volume, a Diageo-SABMiller combination’s strength in emerging markets would be unmatched—especially in Africa, one of the world’s most promising beer markets. SABMiller is a dominant force in South Africa and is aggressively expanding across the continent, while Nigeria is the biggest export market for Diageo’s Guinness.
Nigeria has been one of the world’s fastest-rising beer markets in recent years, but the market contracted in the second half of 2013, and, with consumers also increasingly bypassing Guinness for value brands, Diageo’s Nigerian sales dropped by 10% for the six-month period.
Considering Diageo’s desirable position in Africa, rumors have also swirled about the possibility of A-B InBev making a bid for Diageo’s beer business as a way of becoming a major player in the African beer market.
