Highlight of the Week of October 12, 2015

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of October 12, 2015:

• Anheuser-Bush Inbev agrees to buy SabMiller for 68 billion British Pound
• Walmart warns that strong US-Dollar will hurt its earnings.

AB-INBEV TO BUY SABMILLER FOR 68 BILLION BRITISH POUND:
On Tuesday, October 13, SABMiller (LSE: SAB) announced, that it has agreed to sell itself to Anheuser-Busch InBev (NYSE: BUD) for US$104 billion (£68 billion) in a deal that will be the biggest takeover of a British company and create the world’s first global brewer, with a value of around US$275 billion, in what could be one of the top six corporate takeovers in history.

AB InBev – which brews Budweiser and Stella Artois – proposed to pay £44 a share in cash for each SABMiller share. As can be seen from below chart, based on the news SABMiller shares rose 8.6% to £39.31.

The takeover, one of the top six deals in corporate history, will create a brewing empire making about a third of the world’s beer. AB InBev is already the world’s biggest brewer, and SABMiller is its closest rival.

The deal would create a company generating more than US$ 70 billion of annual revenue from brewing 80 billion liters of beer a year. The giant corporation will have big operations in Europe, north America, Latin America and the Asia Pacific region, and will give AB InBev, the brewer of the US’s favorite beer, Bud Light, access to the fast-growing African beer market.

WALMART GIVES EARNINGS WARNING:
On Wednesday, October 14, Wal-Mart Stores Inc. (NYSE: WMT) suffered its worst stock decline in more than 27 years after predicting a drop in annual profit, underscoring the giant retailer’s struggles to reignite growth.

As can be seen from below chart, it slid further on Thursday. Wal-Mart dropped about 5.7% on Thursday to post a new 52-week low of U$58.61 against a 52-week high of US$90.97.

Earnings will decrease 6% to 12% in fiscal 2017, which ends in January of that year, the Bentonville, Arkansas-based company said at its investor day on Wednesday.

Investors were stunned and its stock plunged 10% on Wednesday, instantly wiping out more than $21 billion in shareholder wealth. That drop was bad for anyone who owns shares of Walmart.

PGM CAPITAL COMMENTS:

AB-Inbev – SABMiller merger:
Anheuser-Busch InBev’s proposed $106 billion deal to buy SABMiller will create the world’s largest brewer — an intercontinental giant with 30% of global beer sales.

The deal is partly motivated by both companies’ need to defend their market share in mature markets as younger consumers abandon big brands and move towards craft beers; but perhaps more importantly, it offers AB InBev access to the beer industry’s last great growth frontier — Africa.

Analyst forecast that 40% of profit growth in the brewing industry over the next decade will come from Sub-Saharan African markets, but InBev, which owns brands including Budweiser, Corona and Stella Artois, has yet to establish a foothold in the region. By contrast, SABMiller has around 40 brands in Africa, and makes around a third of its profit and revenue across 37 African markets.

The man behind it all is, Brazilian riches man Jorge Paulo Lemann, the head of private equity firm 3G Capital, which has done deals with Kraft, Heinz, and Burger King.

In 1999, Lemann and two partners created AmBev, a master company of all the brewers they had acquired.

Then in 2004 AmBev bought Belgian brewer Interbrew to create InBev. Then InBev bought US-based Anheuser-Busch for US$52 billion in 2008.

Now Anheuser-Busch InBev is bidding for SAB Miller.

WalMart Earnings Warning:
Wal-Mart faces tough competition on multiple fronts, from the relentless expansion of online leader Amazon.com Inc to dollar stores and supermarkets fighting for a piece of its grocery business. Its international operations are also under pressure with a stronger dollar eating into sales.

Wal-Mart also announced a US$20 billion share buyback but the drop in its share price wiped out close to the same amount in market value, and the 10 percent drop was the worst one-day percentage performance since January 1988.

As can be seen from below chart, the company’s shares are down more than 30% YTD and currently trading at a 4-year low.

The company said it would slow the pace of new-store openings in the U.S., where it operates about 4,600 outlets. Last fiscal year, Wal-Mart opened 354 U.S. stores, including Supercenters and its smaller Neighborhood Markets. Next fiscal year, the company estimates it will add between 135 and 155 stores.

Because of the slowdown, Wal-Mart now expects capital investments of about US$11 billion next business year, down from the US$12.4 billion it expects to spend this year.

Until next week.

Yours sincerely,