Diageo and SABMiller merger rumoured

Diageo and SABMiller are enjoying a rise in their stock prices on the FTSE 100 amid rumours that the companies may merge.

Trading news site Money Observer reports that the speculated merger – which would see the creation of a drinks group worth over £100 billion – could put to rest a rumoured bid by AB Inbev, who are said to be interested in using Diageo’s beer business as a strong route into the African market.

Diageo shares rose 1.2 per cent to 1,888p in early trading today (Tuesday 1 July) from 52-week low of 1,768p, while SAB was up 0.15 per cent to 3,394p from a 52-week low of 2,661p.

The combined businesses would generate annual free cash flow of around £5 billion, according to Barclays analysts. A deal would allow SAB to nip AB Inbev’s approach and access Diageo’s Guinness beer business which could produce cost savings of £430 million from using SAB’s global beer distribution network alone.

As the drinks business has reported previously, Diageo has also been building a stake in United Spirits for access to India, the world’s largest whisky market in terms of volume, in which it sees an opportunity to circumvent the country’s strict rules on imported goods.

If successful, United’s network would also allow Diageo to distribute its own beverages and high margin premium spirits, such as Johnnie Walker whisky and Smirnoff vodka.

India’s alcoholic beverage market is estimated to be worth upward of $16 billion (£9.34 billion) and growing.