OREANDA-NEWS. An acquisition of SABMiller could lead to Anheuser-Busch InBev being downgraded by multiple notches, but the brewer would probably remain solid investment grade if the deal included significant equity funding and some divestments, Fitch Ratings says. A fully debt-funded transaction would lead to a sharp rise in leverage and a possible downgrade below investment grade.

The two companies today confirmed ABI's approach to SABMiller to discuss their combination. But a formal offer by ABI is not on the table at the moment.

We performed a scenario analysis last year looking at the merits and credit weaknesses of the possible transaction, including the review of different potential capital structures (see link below). We calculate that ABI's net debt/EBITDA leverage could rise to over 6.0x in a fully debt-funded transaction that values SABMiller at a 30% premium to yesterday's market enterprise value. A deal with the same premium but with 45% paid for in equity would result in a more manageable increase to around 4.5x at closing.

It is likely there would be multi-billion-dollar proceeds from asset divestments that anti-trust authorities could impose in the US and China, and scope for steady deleveraging thanks to solid free cash flow, both of which would help the credit profile. Under these assumptions and in consideration of its very strong competitive profile, the combined company would have the potential to retain a rating in the 'BBB' category. Leverage is already stretched for ABI's 'A'/Stable rating, and even an all-equity deal that did not increase leverage could still put pressure on the rating due to the execution risk it would create.

We continue to believe that a combination of ABI and SABMiller would have strong operational merits. A tie-up would create a global group with exposure to many high-growth and profitable markets. The combined group's cash flow generation should be strong, despite challenges in organic revenue and profit growth. These include currency weakness in Brazil and the ongoing market share loss in the US (see link below).

But a deal could also amplify the mismatch between debt and cash flow in the group as a whole, which results from debt being mostly outside the core cash-generating subsidiary AmBev. The combined business would also have a relatively large currency mismatch between its debt and revenue. Over half of cash flow would be generated in Latin America, eastern Europe and Africa, while most debt will be in dollars or euros, especially after new debt is raised to fund the deal.