17 Sep 2015 Why SABMiller’s $250bn mega deal may just happen this time

The arguments in favour of this marriage are many – as are the arguments against. Broadly, those in favour claim efficiencies of scale and the fact the huge geographical footprints of the two companies might overlap, but the overlay is not as prohibitive as it might seem at first.

Those against a deal cite regulatory problems, the most obvious of which is that the combined company will be three times larger than its nearest rival. If competition authorities let this one through, they really will be setting the scene for a single monster brewer for decades to come.

Although these arguments have reverberated before, this time – to abuse a phrase – its different – or at least a little different.

First, both SABMiller and ABInBev have been hugely fast-growing companies over the past decades, based primarily on a strategy of acquiring smaller rivals. At one stage, SABMiller was adding a new brewer to its portfolio every month. Although it has many very old brewers in its stable, ABInbev essentially grew from a single small Brazillian brewer, Brahma, to being the largest brewer in the world, and twice as large as its nearest rival, in a mere 25 years.

But that growth has recently come to a juddering halt. ABInBev’s turnover has been edging up nicely for the past three years, until suddenly last year, the unspeakable happened – it declined.

SABMiller, which has only had temporary setbacks during the past two decades, has also now reported two consecutive turnover declines in succession. That too is remarkable.

Those turnover declines, and the consequential increase in the relative difference between the share prices of the two companies, reinforces the notion that this time, it may well be real.

Before today, SABMiller’s share price had dropped twenty percent since May, and is down about 10% over this year. InBev’s share price has come down very sharply over the past few months, but it is still up about 10% over the year.

The movements suggest shareholders are drifting away from the big brewers, perhaps losing faith a bit in their organic growth ability which seems to have defied gravity for so long.

From the ABInBev point of view, if you were looking for a good time to strike, this would be it. Any longer, and the price differential might close out.

The third reason to be confident that a real bid might emerge this time lies in the circumstances of the announcement.

The Financial Times has reported that it emerged on Tuesday that one of SABMiller’s biggest shareholders, the US consumer goods company Altria, had cancelled two appearances this week at consumer goods conferences hosted by BofA Merrill Lynch and Stifel.

That fuelled speculation that SABMiller might be in play and the newspaper approached the company, which confessed it had received an expression of interest.

It said however, that no formal proposal has yet been received and the board of SABMiller has no further details about the terms on offer. ABInBev also put out a brief statement, which might seem insignificant, but in fact, this is the first time in many months of fevered speculation that both companies have formally responded.

The fourth reason for optimism can be imputed from the response of the market. After their short announcement, SABMiller’s share price jumped firmly over 20%, and ABInBev’s jumped just over 7%. Clearly, the market likes the idea. This will surely spur negotiations over terms.

So if it happens, what would a combined “megabrew” look like? In order to clear competition authority hurdles, some shaving of the portfolio would obviously be in order, and the largest but perhaps the easiest problem would be in the US.

The two companies effectively control almost all of the US market, with each controlling one of the two biggest brands: ABInbev’s big brand is Budweiser while SABMIller owns Miller.

But the Miller subsidiary has historically been a poor performer for SABMiller and it currently operates in a consortium arrangement with the third largest US producer Coors. Conventional wisdom is that Coors would be the obvious buyer of Miller brands and would relish doing so.

The rest of the world is less complicated. ABInBev has big operations in Brazil, but less so in the northern part of Latin America. SABMiller is dominant in Africa and some parts of Asia, notably Australia. Europe is a bit of a muddle, but there is a bit of an East-West split. From a geography point of view, it’s complicated but doable.

Even if this problem is solved, what nobody knows however is how competition authorities will respond to the bigger question of allowing one player to control 30% of global production, when the next biggest would only have 6%.

Even if there is no real increase in dominance of the new company at a country level – and even if it had no more than 25% of the global market – would this be like creating a monster that would gradually gobble up all the other major players?

Addressing that question will be perhaps the most contentious issue, if and when the formal negotiations begin.

Source: Financial Mail

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