Champagne on ice for AB InBev’s Megabrew domination plan
Scheherazade Daneshkhu in London
Litany of regulatory and cultural hurdles must be cleared for brewer’s dream to be realised
A man walks into a bar. There is a one in three chance that the beer he orders will be made by a single company, if Anheuser-Busch InBev’s £68bn takeover of SABMiller goes ahead.
The combination of the world’s two biggest brewers, agreed in principle after frantic talks in London this week, would be the third-largest takeover in history — a remarkable achievement for Jorge Paulo Lemann, the Brazilian billionaire who bought South America’s Brahma in 1989 and has been swallowing the sector ever since.
The deal would create a company with tentacles stretching from Peru to China, via Australia, Africa and the US that rakes in just under half the industry’s profits and employs 224,000 people, at least until the cost-cutting starts.
Carlos Brito, AB InBev’s hard-nosed chief executive, says the takeover will give consumers more choice because the new group — dubbed Megabrew by analysts — will start selling the brands of both companies across the world.
Africa, a previously Budweiser-free zone, would get crates of AB InBev’s portfolio of brands, including Skol, Stella Artois and Corona. SAB’s Peroni, Grolsch and Pilsner Urquell would start showing up in countries dominated by Mr Brito’s Belgian-Brazilian brewer.
AB InBev will pay £44 in cash for each SAB share, a 50 per cent premium to its target’s undisturbed share price. The bid includes a partial share offer for 41 per cent of SAB’s stock, which is worth £39.03 a share.
But the proposed takeover also raises a whole host of uncertainties, including how AB InBev comes up with financing. Analysts predict it needs about $60bn in bonds and loans, which would set a new record for debt issuance and acquisition financing.
Debt bankers said the financing was likely to be completed primarily in dollars and euros with only “a sprinkling of sterling”. Moody’s, the rating agency, has placed AB InBev’s rating on review for downgrade.
Bank of America Merrill Lynch and Banco Santander are leading the deal, which is expected to have between seven and 11 investment banks working on it in total, said people familiar with the situation.
The other big question is how regulators the world over will regard the combination — this uncertainty explains why SABMiller’s share price is hovering below the cash offer at £39.90.
The areas of largest concern are the US — where AB InBev already has nearly half of the market — parts of Europe and in China. In SAB’s original home of South Africa, the cost-cutting, synergy-driven managers at AB InBev may clash with the local government, which is anxious to protect jobs in one of its biggest industries.
The status of SAB’s joint ventures with Castel, the French vintner and brewer, and its minority stakes in Anadolu Efes, which operates in Turkey, Ukraine and Russia, have also been thrown into question.
Both sides also sell soft drinks, and there is a potential clash between AB InBev’s bottling arrangement with PepsiCo and SAB’s with rival Coca-Cola. This could threaten SAB’s pan-Africa bottling deal with Coke, agreed almost a year ago, but still yet to close.
Meanwhile, small brewers are also asking how the Megabrew deal will affect their efforts to grab market share.
Paul Gatza, director of the Brewers Association, representing US craft brewers, thinks the impact here will be minimal: “Most craft brewers operate in a different sphere. Many would look at a potential deal of AB InBev and SAB as not relevant to their businesses and will keep on doing what they do — make flavourful and high-quality beer.”
FT reporters examine the most pressing issues in some key markets around the world:
China
No one knows how Beijing will apply its relatively new antitrust law — in force since 2008 — to a deal as large as this one, writes Patti Waldmeir in Shanghai.
Between them, the two groups control more than 40 per cent of China’s beer market. Snow — a low-cost beer owned jointly by SAB and state-owned China Resources Enterprise — sells more in a year than all the beer in Germany. So the combination would certainly attract prolonged and detailed scrutiny from the Ministry of Commerce, the entity charged with enforcing the mergers and acquisitions provisions of China’s anti-monopoly law.
SAB could be forced to sell its 49 per cent stake in China Resources Snow. When InBev acquired Anheuser-Busch in 2008, in the first published ruling of the new antitrust regime, the Chinese regulator forbade InBev from taking a stake in CR Snow, which makes the country’s top selling beer with 21 per cent of the market.
But local competition lawyers say it is not a foregone conclusion that Beijing will force the sale of Snow. The merged group could dispose of other smaller holdings in China, to bring its total market share down to only 30 per cent, without touching the Snow stake, some analysts say. The Ministry of Commerce also has the ability to waive the 2008 restriction on InBev purchasing a Snow stake when considering the new deal.
Europe
The regulatory fate of the Megabrew deal in Europe is likely to rest on how Brussels competition regulators decide to approach it, writes Duncan Robinson in Brussels.
Regulators generally get involved when a combined company would have market share of more than 40 per cent. So if the European Commission examines the beer market on a purely geographic basis, lawyers expect they will wave through the deal. AB InBev and SAB do not have much crossover in the 28 EU nations: where one is very dominant, the other tends to be very weak.
Issues might arise in Belgium, where AB InBev has a 53.1 per cent market share, but SAB has just a 0.2 market share, which could easily be sold off. Similarly small disposals in the Czech Republic might also be necessary, say analysts.
But if the commission looks at certain product lines — such as premium lager served in bottles — then there is more overlap. In that case, the commission might demand the sale of a major global brand — Grolsch or Peroni are possible — as a condition to win approval.
Africa
SAB long ago outgrew South Africa — its country of birth 120 years ago — to become a global player, write Andrew England in Johannesburg and Maggie Fick in Lagos.
But for many South Africans, SAB remains an iconic South African brand and the proposed acquisition raises both financial and emotional issues. The state-owned Public Investment Corp is SAB’s fourth-largest shareholder, and it wants the combined group to have some kind of listing on the Johannesburg Stock Exchange. SAB is the JSE’s second-largest stock.
The South Africa government, meanwhile, wants assurances that a merger will not hit local jobs or the businesses that supply SAB’s seven local breweries. The Department of Trade and Industry, led by a minister who is a member of the communist party, fought Walmart’s $2.4bn takeover of a local retailer four years ago, ostensibly because of the threat to local jobs and businesses.
The powerful Congress of South African Trade Unions has already said it rejected the deal, claiming it would affect tax revenue and jobs.
In west Africa, the deal could spark greater competition. Diageo and Heineken control 90 per cent of the market in Nigeria. SAB has only a 10 per cent share. The London-listed brewer has focused mostly on the cheap end of the market.
A rival brewer predicted that AB InBev would try to introduce premium brands. “I expect that strategy will change and there will be a bit more urgency or hunger to take more market share instead of just slow but sustained growth,” he said.
Latin America
A SAB investor presentation on Latin America in June shone a light on why AB InBev wants to buy the group, at least from a regional perspective, writes Joe Leahy in São Paulo.
SAB sells 96 per cent of its Latin America volumes in countries such as Colombia, Paraguay and Ecuador, while rival AB InBev is strong in Brazil, Argentina, Chile, Uruguay and Mexico. As a result, the two beer behemoths should have few antitrust issues in the region, though AB InBev might have to divest small operations in a couple of countries, with Heineken seen as a likely buyer.
Minority shareholders of Ambev, AB InBev’s Latin American arm, are watching carefully, though. There is much speculation that AB InBev could use it to make part of the acquisition. One strategy would be for the parent to sell SAB’s Latin American operations to Ambev in exchange for shares. This would increase the parent company’s 62 per cent stake in Ambev to 75 per cent, according to at least one analyst.
US
The last time AB InBev sought antitrust clearance for a US deal — the 2013 acquisition of Mexico’s Grupo Modelo, it badly underestimated the American watchdogs, write Gina Chon in Washington and Lindsay Whipp in Chicago.
The Department of Justice ended up slapping the group with a lawsuit and forcing it to sell off Mondelo’s US business.
This time around, to win approval for an even bigger deal, AB InBev would have to show it has learnt from its mistake. The combined company would control about 70 per cent of the US market.
One likely path to regulatory approval would be to sell off SAB’s 58 per cent stake in its MillerCoors joint venture.
For Molson Coors, the JV partner, that presents an opportunity it would not want to miss. Analysts believe it is the heavy favourite to buy the stake, given that AB InBev would want to move quickly.
The takeover would automatically trigger Molson’s right to boost its stake in the JV to half from the current 42 per cent, and it is guaranteed both the first and final bid for the remaining share.
Some analysts are not completely ruling out other possibilities, such as potential interest from Heineken.
The DoJ will also assess distribution, marketing and other operations that affect who controls pricing and supplies of the beverages, so AB InBev may have to sell other assets to gain regulatory approval. The DoJ is separately probing whether the group’s acquisition of two California beer distributors would pose unfair challenges for craft brewers.
Additional reporting by Gavin Jackson in London |
