What's Brewing? The InBev & SABMiller Merger

The recent news concerning the potential mega merger of the top two beer brewing companies in the world, AB InBev and SABMiller, represents not only a dangerous trend for acquisition activity in that industry but also for the overall trend toward monopolies across the business spectrum.

The latest takeover bid from AB InBev, the third bid it has made to SABMiller in what has become an acrimonious situation, is for $103 Billion. This represents a 3% increase in the valuation over the previous bid and comes amid news from SABMiller of a program of increased cost saving measures at the beleaguered company.

The proposed deal, if it is ever agreed upon, is expected to receive intense regulatory scrutiny because whenever the top two companies in any industry begin discussing a merger it is always going to be reviewed closely. The combined company would control a staggering 31% of the global beer market.

The world financial markets are preparing for a potential merger of these two mega-brewing companies with the understanding that in order to satisfy the regulatory and anti-trust scenarios both companies would have to sell off a number of "smaller" brands. This has led to a vigorous increase in trading activity around stocks such as Coors and Heineken (which would have the next largest market share of global beer sales with 9%) as those brewers figure to be players to acquire the brands being sold off.

Hurdles

The regulatory powers from the various governments involved in a global merger of this magnitude will be concerned with two main issues:

• Impact on competition in the marketplace • Higher prices for the consumer

In my experience in the supplier side of the food industry I would also mention the impact on the ingredient suppliers of the various commodity products involved in the mass manufacturing of beer at these volumes. It is always dangerous for any industry to have too much purchasing power condensed into a few companies because they can play hardball with the suppliers over pricing.

However, in fair balance, the major brewing players in this industry will point to the trend in consolidation being accelerated by the need to regain leverage with ingredient suppliers of these commodity items because of the rise of micro brewing and craft brewing labels. This is an especially problematic trend for both AB InBev (makers of Budweiser among others) and Miller in the U.S. marketplace where the beer market has stagnated, growing just 0.5% in 2014.

The American consumer, in general, is seeking different flavors when they select a beer to consume, which has spurred a dramatic increase in the craft brewing segment (up 17% in share of sales in the marketplace in 2014). AB InBev controls 6 of the top beer brands globally in terms of sales, but has seen the U.S. market penetration fall off. These same brands have also saturated the European market.

New Pathway

This trend line explains the growth strategy for AB InBev: They are interested in merging with SABMiller because it will provide them with new pathways to grow Budweiser and their other top brands. SABMiller is well positioned in certain parts of Africa, especially South Africa, where beer consumption is on the rise, and the consumers in that marketplace prefer big global brands versus smaller local beers.

The same trend can be stated for Miller in Australia, where the consumer favors larger beer brands, and where AB InBev has had difficulty distributing their products and growing their market share in that continent which is a huge target market for beer consumption.

SABMiller has had some trouble with shrinking market share in other global areas as well as flat growth in the U.S. market with Miller Light and Miller Genuine Draft (their primary top branded products). They do not have the capital at this point to reposition the company, hence the cost cutting measures they announced recently. This merger would be the pathway for their brands to gain entry into other markets or better penetrate others via the AB InBev distribution network.

Unwarranted Reticence

When Anheuser Busch merged with InBev back in 2008, there was a sense of reticence among beer drinkers in the U.S. that this foreign takeover of an American brewing giant would equate to a change in the formulation for Budweiser, the ubiquitous American beer. The assumption at that time was that InBev, known for its intense focus on the bottom line would try to "cheapen" the taste profile of Budweiser to control costs.

However, that reticence proved to be unfounded, as InBev made very few changes at all to the operations at AB that would be viewed negatively by consumers or Wall Street investors alike. They conversely proved that they are highly knowledgeable in the production of large volumes of product and distributing that product efficiently. These attributes could serve SABMiller well if the merger is consummated at some point in the near future.

Meanwhile, between now and the end of this week the talk will be centered upon the valuation of SABMiller, the impact it will have on the global beer market, and the significant hurdles on the regulatory side which could derail this merger. In the end analysis, both companies will come to realize that if they join forces they may have a chance of regaining their footing in what has become an increasingly crowded U.S. marketplace. It bears watching because one of the largest mergers in any industry is what is on tap and it will have a significant effect on future mergers and acquisitions activity.

Frank J. Maduri is a freelance writer and journalist with numerous publishing credits for a variety of news organizations. He has an extensive background in marketing in a range of industries including the food and beverage market. He has been involved in several transactions involving commodity products sourced throughout the world.