Deal on tap?

Beer merger would make one of world’s largest com­pa­nies,

Toronto Star - - FRONT PAGE - LISA WRIGHT BUSI­NESS RE­PORTER

A beer merger of record pro­por­tions is brew­ing as An­heuser-Busch InBev, the maker of Bud­weiser, Corona and La­batt’s prod­ucts, con­firmed Wed­nes­day it has made a takeover ap­proach to SABMiller PLC, the owner of Miller Gen­uine Draft and Grolsch. The deal would be the big­gest in the in­dus­try’s history, cre­at­ing a $245-bil­lion (U.S.) global com­pany. Tall boys AB InBev has re­port­edly been cir­cling SABMiller for a while. The get-to­gether of the world’s two big­gest suds mak­ers would hand con­trol of nearly one-third of global beer sup­ply to one com­pany and trig­ger an in­tense an­titrust re­view. The mega deal could draw ob­jec­tions from reg­u­la­tors wor­ried the deal might sti­fle com­pe­ti­tion and lead to higher prices.

But if it goes through, it would lead to some of the world’s most iconic beers com­ing un­der one roof, namely top guns Bud­weiser and Miller.

The com­bi­na­tion would cre­ate one of the world’s top 10 com­pa­nies and sur­pass Proc­ter & Gam­ble Co. and Nes­tle SA in mar­ket value.

The tie-up is con­sid­ered end game for global beer merg­ers at a time when mi­cro­brew­eries are cut­ting into their mar­ket share and op­tions for con­sol­i­da­tion nar­row in a stag­nant in­dus­try.

An­a­lysts say the com­bi­na­tion would help both firms com­bat a slow­down in de­vel­oped mar­kets such as the U.S. and Europe, where drinkers are seek­ing out craft brews, wine and spir­its in­stead of beer.

AB InBev, whose mar­ket value is more than dou­ble that of SABMiller, said Wed­nes­day it in­tends to make an of­fer for the com­pany. The pair would have com­bined an­nual sales of about $81 bil­lion.

A com­bi­na­tion of the beer mak­ers had been seen as likely for years as they have lim­ited over­lap and are not con­trolled by a fam­ily foun­da­tion like their main com­peti­tors, Heineken NV and Carls­berg A/S.

AB InBev has boosted rev­enue more than five­fold in the past10 years with the help of al­most $100 bil­lion in ac­qui­si­tions. Its growth is now set to slow over the next five years, es­ti­mates com­piled by Bloomberg show.

Weak­en­ing economies in Brazil and China, two of the growth en­gines for brew­ers in re­cent years, may have has­tened AB InBev’s ap­proach, Ross Col­bert, an an­a­lyst at Rabobank In­ter­na­tional. The re­sult­ing drop in beer con­sump­tion in those emerg­ing mar­kets “is driv­ing the push for greater con­sol­i­da­tion,” he said.

An ac­qui­si­tion of SABMiller would give AB InBev ac­cess to more than $7 bil­lion of rev­enue in Africa, with brands in­clud­ing Castle lager, and al­most $4 bil­lion of sales in Asia, re­duc­ing AB InBev’s de­pen­dence on the Amer­i­cas and Brazil. Medium-sized brews The deal means sec­ond-tier com­pa­nies such as Carls­berg and Heineken will face a mas­sive ri­val.

“As your com­pe­ti­tion gets big­ger and big­ger, it gets tougher and tougher to com­pete,” said An­drew Hol­land, an an­a­lyst at So­ciété Générale in Lon­don.

“Heineken and Carls­berg face an en­larged ABI-SAB, and no­tably a man­age­ment team that have an ex­tremely good track record.”

One of the big­gest ben­e­fi­cia­ries of the big beer merger could be Mol­son Coors Brew­ing Co., which will have an op­por­tu­nity take full con­trol of the MillerCoors joint ven­ture formed with SABMiller in 2007 in the U.S. to mar­ket all of their prod­ucts.

An­a­lysts say the new gi­ant will prob­a­bly off-load its stake in MillerCoors to pass muster with reg­u­la­tors. The ob­vi­ous buyer is Mol­son Coors, which al­ready owns a 42-per-cent eco­nomic in­ter­est in the com­pany with a ros­ter of pop­u­lar brands, in­clud­ing Miller Lite, Coors Light and Blue Moon — and has the right of first and last of­fer.

“It’s a real op­por­tu­nity for Mol­son Coors,” Philip Gorham, an Am­s­ter­dambased an­a­lyst at Morn­ingstar Inc., said in a phone in­ter­view. “It’s pretty ob­vi­ous that Mol­son Coors is the only buyer in town. Gen­er­ally, that means they ac­quire the as­sets at a good price.”

While gains and op­er­a­tional cost sav­ings would be big­ger if Mol­son buys all of SABMiller’s 58-per-cent stake in the joint ven­ture, the fam­ily-con­trolled com­pany could pre­fer to con­tinue work­ing in a part­ner­ship, said Ian Shack­le­ton, an an­a­lyst at No­mura Hold­ings Inc.

He sees a sce­nario where Heineken NV and Mol­son buy the brand.

“There are quite close re­la­tion­ships be­tween Mol­son and Heineken, some fam­ily links if you go back way into the mists of time,” he said. “In ad­di­tion, they have some trad­ing links. In Canada, Mol­son dis­trib­utes Heineken prod­ucts, and they ac­tu­ally widened that agree­ment in the last year. It’s not a case of these guys are to­tally en­e­mies, quite the op­po­site.”

If Mol­son were to make the pur­chase alone, the price of at least $10 bil­lion is nearly the en­tire com­pany’s mar­ket cap, he said. Heineken is three times the size of Mol­son and would be bet­ter equipped for fi­nanc­ing a deal.

“We have seen the news, but have no com­ment,” said Colin Wheeler of Mol­son Coors in an email to the Star.

A deal be­tween AB InBev and SABMiller is un­likely to oth­er­wise spur ma­jor M&A ac­tiv­ity for Carls­berg and Heineken be­yond op­por­tu­ni­ties that may arise as the two larger com­pa­nies divest as­sets for reg­u­la­tory ap­proval, said Trevor Stir­ling, an an­a­lyst at San­ford C. Bern­stein. Half pints Craft brew­ers such as Dar­ren Smith of Lake of Bays Brew­ing Com­pany are watch­ing the po­ten­tial merger with a cau­tious eye.

“It would ob­vi­ously be con­cern­ing for us,” said Smith, also vice-chair­man of On­tario Craft Brew­ers.

“They al­ready have enough mar­ket con­trol in On­tario and around the world,” he said, adding it makes it more timely that the pro­vin­cial gov­ern­ment is in the midst of an over­haul of how beer and wine are sold.

Small-scale craft brew is one of the only growth seg­ments in the beer in­dus­try. In 1981, Cana­di­ans drank an av­er­age of 99.69 litres of beer per year. In 2014, we chugged 63.35 litres per per­son.

Mean­while, wine and spir­its’ share of the al­co­hol mar­ket has been ris­ing steadily. Those trends are mir­rored in other “ma­ture” mar­kets such as the U.S. and U.K.

Go­ing against those big-pic­ture trends, how­ever, is craft beer’s rise. At the LCBO, sales of On­tario craft beer have posted dou­ble-digit in­creases in both value and vol­ume for the past decade.

Alan Mid­dle­ton, mar­ket­ing pro­fes­sor at York Univer­sity’s Schulich School of Busi­ness, said mi­cro­brew­ers from Lake of Bays to Steam Whis­tle would likely ben­e­fit from the merger, as the gi­ant cor­po­ra­tion would look to cut costs in es­tab­lished mar­kets such as Canada and the U.S. and fun­nel prof­its to growth tar­gets such as Asia and Latin Amer­ica.

“They won’t be push­ing any new prod­ucts here, and they’ll be spend­ing less on pro­mo­tions and advertising,” which he said paves the way for a stronger mar­ket pres­ence of craft brew­ers.

Mol­son and La­batt em­ploy­ees, mean­while, “will be ner­vous” at the prospect of a deal that would likely in­volve cost cut­ting and work­force re­duc­tions, said Mid­dle­ton.

A La­batt spokesper­son in Canada had no com­ment on the po­ten­tial merger. With files from Star wire ser­vices

BRUNO FAHY/AFP/GETTY IM­AGES FILE PHOTO

Car­los Brito, CEO of brew­ery group AB Inbev, is plan­ning a takeover bid for the next-largest brewer, SABMiller.

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