A megadeal stole the show in beverages in 2015. Speculation had been fermenting for some time, but it got to the stage in September where SABMiller (SAB) had to respond to a spike in press reports about a mooted merger with its larger rival, Anheuser-Busch InBev (BE:ABI).
ABI, which makes Budweiser among others, was already the world's largest brewer with 20.8 per cent of retail sales globally. But by taking on its rival, which accounts for 9.7 per cent of global sales through brands such as Peroni and Grolsch, it will create an even larger gulf between itself and what will be the next biggest brewer, Heineken. While shareholders might be sad to see the UK's only listed brewer disappear from the index, it seems management drove a hard bargain as the £44-a-share offer was a roughly 50 per cent premium to the SAB closing price of £29.34 on 14 September 2015 - the last business day prior to renewed speculation.
The deal, inevitably, begs the question whether there will be more consolidation in the sector? The answer is 'kind of', given various parts of both companies may need to be sold to satisfy antitrust issues although another mega-merger doesn't seem likely.
For the rest of the sector, consumer demand is the key driver at home and abroad. Businesses acting in this space must ensure they have the brands to weather the groundswell of change going on in the UK supermarket sector. The pitter patter of discounter feet - which belong to Aldi and Lidl - continue to haunt some of the more established names, which are reviewing their offering. Companies such as Tesco (TSCO) have stated that they are rationalising the number of brands they stock, meaning drinks businesses need must-have products.
Falling unemployment is a positive for companies selling drinks in the UK, although the latest data from the Office for National Statistics shows annual pay growth slowed from 2.5 per cent to 2 per cent for the three months to October 2015 - weaker than prior to the financial crisis. But sales growth seems healthy at most pub groups for the time being, so this may help drinks manufacturers.
One hurdle is consumers' increasing focus on health, as highlighted in our Food Fight feature. But soft drinks companies are navigating this by developing healthier drinks. Also, although a generalisation, there is not yet deemed to be the same fixation on calorie content in some emerging markets, meaning exposure to such areas is useful.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
|---|---|---|---|---|---|---|
| AG BARR | 512 | 598 | 19.1 | 2.4 | -15.7 | Hold, 533p, 22 September 2015 |
| BRITVIC | 678 | 1,776 | 14.5 | 3.4 | 1.2 | Buy, 712p, 25 November 2015 |
| COCA-COLA HBC (CDI) | 1,390 | 5,028 | 23.3 | 1.9 | 23.9 | N/A |
| DIAGEO | 1,828 | 45,994 | 19.2 | 3.1 | -3.8 | Hold, 1,850p, 31 July 2015 |
| SABMILLER | 4,138 | 67,046 | 27.3 | 1.8 | 22.3 | Hold, 4,057p, 13 November 2015 |
Favourites
The largest constituent in the sector once SAB exits the FTSE will be distiller Diageo (DGE). It is well geared into emerging markets, with more than two-fifths (£937m) of its operating profits for FY15 coming from developing regions. Its 3 per cent dividend yield helped it make our selection of worry-free shares. We have the company on a hold, but any share price weakness could see us turn more bullish. Another favourite is C&C Group (CCR) thanks to its significant market share strength and strong free cash flow. Upmarket mixer manufacturer Fevertree (FEVR) also looks indomitable.
Outsider
Since the September 2013 float, Stock Spirits (STCK) has fallen some 44 per cent. This was not helped by a November statement revising full-year profit guidance from €60m-€68m to €50m-€54m before any FX impact. Weak customer orders in one of its key markets, Poland, were to blame.
