The end of history
Here's why ABI shouldn't bid for SABMiller
Reader advisory: read this column quickly. Very, very quickly. With haste, good sir, with haste. For any second now Anheuser-Busch InBev is going to launch its much anticipated bid for SABMiller and these musings will become in an instant so much electronic fish wrap.
Or could a bid be weeks, months, perhaps years distant – if it ever occurs at all? This bid to end all bids, the end of history for the brewing industry as we know it, the moment that Brewers’ Guardian need change its masthead from plural to singular, may never arrive.
Acquiring SABMiller won’t be easy, but not because of financial wherewithal. There have been numerous whispers in the financial media of AB InBev raising a war chest, and there’s no indication as yet that they’re going to have start looking under sofa cushions for stray nickels and dimes. They’ll find the scratch to make it happen.
The underlying issues are two-fold. Firstly, can they make a successful bid? SABMiller is a complex beast, not some single country market leader, with respect here to Groupo Modelo. There are numerous issues to untangle before any cheques can be signed.
And secondly, should they bid at all for SABMiller? What’s the opportunity cost of the foregone alternatives, and given that the price tag will come in at a premium over the market capitalisation, say £70bn more or less, that’s a lot of potentially attractive alternatives to pass up on.
There any number of sticking points that could scuttle an ABI bid. The first are the shareholders, specifically the two largest, the Altria Group (the former Phillip Morris, which sold Miller to SAB back in 2002) in exchange for what was at the close of 2013 a 26.8% economic and voting interest; and BevCo, a holding company of Colombia’s Santo Domingo Group, which has an approximately 14% economic and voting interest that it gained when SABMiller acquired Bavaria.
It could be that both or either would agree to an offer but both have seats on the SABMiller board, so a direct say in the company’s direction, and can count on substantial dividend income. There’s no certain outcome in ABI’s favour here; at the very least an offer well above share price would be required.
There are also SABMiller’s various joint ventures around the world, almost all of which will be affected by an ABI bid. I refer you to page 88 of SABMiller’s Annual Report 2014 for the details but a successful bid would potentially have implications for existing arrangements with China Resources Enterprises.
This should give pause. With the partners having 50:50 share of voice on the board but with CRE holding a 51% stake in the operating company CR Snow, and with various reports over the years of what already might be termed ‘robust’ discussions between the JV partners, there’s no certainty that the existing business relationship will continue here, either.
The other question that can be clustered here are the existing sizeable relationships with soft drink producers. ABI is partnered with Pepsi in Brazil; SABMiller has agreements with Coca-Cola through various operating companies.
Save this date: ABI’s agreement with Pepsi expires at the end of 2017; it renews automatically for an additional 10 years unless written notice to terminate is submitted no later than two years’ prior, so as of 31st December 2015. If ABI were to bid for SABMiller termination of this agreement would be a clear sign that it intended to proceed.
Then there are market concentration issues. As with CRE, should a change of ownership occur Molson Coors would have the option to exercise certain unspecified rights – presumably the option to acquire SABMiller’s stake in MillerCoors. Molson Coors has expansionist ambitions and this may well be an opportunity that it would welcome. But being squeezed between the country’s largest brewer and the frantic growth of the country’s craft brewing community makes on-going future prosperity no certainty. Perhaps there are better options for Molson Coors; perhaps continuation of shared risk is the better alternative.
In China the combination of CR Snow with existing assets would push market share above 30%. This may not be welcomed by Chinese regulatory authorities, especially with a considerable percentage of brewing capacity still in state hands, particularly Beijing Yanjing, itself numbered amongst the world’s top ten brewers as measured by volume.
There’s also much admiration of ABI’s ability to squeeze better margins out of its brewing operations than its peer group. Why can’t Carlsberg, Heineken and SABMiller do as well? What’s the ABI secret?
It’s an interesting question and one that can be turned on its head – if ABI is the outlier in the group, the equally valid question is how long such practices can be sustained. Cutting costs eventually has to have limits. (Just ask ABI’s suppliers, many of whom chafe under contract terms that have payments made months after work is undertaken or completed.)
And as noted elsewhere, most of SABMiller’s markets, in Africa, Asia and Latin America, are markets in growth. Here, surely, there’s a need for sustained investment rather than cost-cutting. The synergies to be achieved may not be as great as one might imagine.
That an ABI bid is in the offing for SABMiller is a rumour that has persisted not for months but for years now. And while there’s reason to believe that at the moment the possibility is being reconsidered afresh, as itemised here there are numerous reasons why such a bid could fail, or if it did succeed might not be as great a success as imagined at the outset.
But ABI has been successful in reducing debt and is in a position – perhaps a need that is now pressing – to do something short of returning cash to shareholders.
So what to do? I’m always happiest when helping people spend their money and this, then, is the subject to be returned to our next column. Assuming, of course, that we’ll still be able to use future rather than have to substitute past in the choice of verb tense.
A verison of this column was first published by the good people at www.just-drinks.com