ABI-SABMiller: the birth of MegaBrew?
The long-awaited showdown for global supremacy is here
And the moment everyone in the brewing universe has been waiting for has arrived, not with a thunderclap or volcanic eruption or heralds trumpeting but rather with a prosaic exchange of email alerts.
The Board of SABMiller notes the recent press speculation and confirms that Anheuser-Busch InBev has informed SABMiller that it intends to make a proposal to acquire SABMiller.
AB InBev confirms that it has made an approach to SABMiller’s Board of Directors.
The apt analogy isn’t from nature or the arts – this is a sporting event. Boxing, the tapping of the opponent’s gloves before the bell rings to signal Round One, comes closest. In the world of brewing M&A activity, this is truly the title fight, the one that determines the World Champion.
And most likely this will be forever and ever, for the combination of the world’s number one and two brewers will be a monster.
AB InBev brews around 410 million hectolitres annually worldwide; number SABMiller clocks in at around 245mhl. Combined their volumes will come in around 615mhl, assuming an almost certain disposal of SABMiller’s 58% equity stake in its American joint venture MillerCoors. It’s a figure that will dwarf the new number two, Heineken, at around 180mhl; and number three Carlsberg, at 135-140mhl.
But beyond volumes this play is really about market shares and market leadership. For starters AB InBev fills in the map where it isn’t present: Australia, sub-Saharan Africa, Colombia and Peru in Latin America; parts of Eastern Europe, notably Poland, the Czech Republic and Romania; and strengthens them in the vast potential that is India (future) and China (present).
And with few exceptions the enlarged market leader will be able to claim the number one or number two spot in virtually every beer market that matters. (Exceptions: UK, where it’ll be third ranked, and Russia, where being third, fourth or lower might well be considered a blessing.)
But before we launch a Name That Company contest, to reshape AB InBev-SABMiller into something less cumbersome – Trevor Stirling at AB Bernstein refers to the combination as MegaBrew, a good first entry – for an ABI to succeed there are a number of hurdles to overcome.
Mind you given that ABI’s bid is now public and the offing, it may well be that a number of the answers to the following questions will become available in the coming days and weeks.
Firstly, there are regulatory hurdles. With MillerCoors claiming a 27% share of US beer sales, and Anheuser-Busch the market leader, clearly something has to give.
And it’s also a highly competitive market, with both imports and the much noted growth in craft beer pushing down the fortunes of mainstream brands, notably Coors Light and Miller Lite. So local knowledge is a plus – in short, it’s hard to see anyone more suitable than JV partner Molson Coors to step up. It’s a company with cash, ambition and in all likelihood legally guaranteed first right of refusal on SABMiller’s stake in the joint venture in the event of a takeover.
Then there’s China. CR Snow, SABMiller’s joint venture with China Resources Enterprise, has market leadership, albeit at a low 20-25% share. But add to this ABI’s Harbin and enlarged Chinese footprint will be above 40% and pushing towards a majority share of beer sales.
Will Chinese regulators move to block the deal? Possibly, especially when such a combination would harm the competitiveness of still state-owned brewers, especially Yanjing, and privatised Tsingtao.
If the deal was blocked, would CR Enterprise acquire the SABMiller JV stake and be willing to go it alone? Unlikely; they wouldn’t necessarily have the required brewing expertise.
No, the wild card bet is that if China proved a complication, that there could be two bidders for the stake in CR Snow, and both would be good fits: Carlsberg and Heineken. The former is already present in Western China but lacks a national footprint. The latter is nowhere in China and this would be the ideal fit to enter the market in scale.
It’s possible. AB InBev has shown a willingness to divest to competitors – or create them, as has been the case with Constellation Brands acquiring the Grupo Modelo brands in the US in perpetuity following ABI’s bid for the outstanding Modelo shares.
Then there’s the question of shareholder intentions. There are two large blocks at SABMiller – Altria, with around a 27% economic and voting interest that it acquired when then SAB transformed itself by adding Miller back in 2002; and the Santo Domingo family with 14% economic and voting interests, held as result of SABMiller’s acquisition of Bavaria in 2006.
While not in possession of any insider knowledge on this point, I think that neither of these parties would be interested in a cash-only offer. But a mix of cash and shares, with a stake in the enlarged company? Now that’d be an interesting proposition.
Does AB InBev have the wherewithal to finance the bid? This is a non-starter as far as speculation goes. ABI will have cash, shares and the bank facilities to make it happen. The question will be what premium will be required above the day before the announcement's closing share price. Given the way SABMiller’s share price reacted it will need to be substantial.
And this may be SABMiller’s best defence, a rising share price combined with shareholder loyalty. AB InBev’s first offer had better be close to, if not actually, its best. This does have a chance of slipping away on the financials.
Should AB InBev make this deal? Within the brewing industry it will be unassailable, unless some unlikely combination of Heineken or Carlsberg, Molson Coors, Kirin or Asahi and perhaps Diageo’s brewing assets was pulled together. And even as I typed this last sentence the likelihood of this ever happening – never, in other words – became apparent.
No, for M&A within the brewing industry, this is the end of history. The enlarged company would be unassailable by any traditional multinational competitors.
The only real downside is that ‘MegaBrew’ will become the enemy that the craft brewing industry has always wanted. If you’re the small guy/good guy you need a villain with which to compete. And the sheer size of this enlarged company makes it an oversized Goliath to craft’s David.
This would be death competitively by a thousand paper cuts. But if successful this transaction I think in some manner marks the high water mark for multinational brewers – markets everywhere are tending to fragmentation and consumer experimentation.
For these trends larger brewers are not so well equipped to compete. And it could well be in retrospect not so many years from now Heineken’s 50% stake in American craft brewer Lagunitas will be seen as the better acquisition to have been made this dramatic September.
A version of this article was first publcished by the good folk at www.just-drinks.com