Big beer merger could ripple across wider beverage sector

Anheuser- Busch InBev’s prospective deal for SABMiller PLC is expected to ripple across other consumer industries in the next few years, from soda makers and bottlers to snack manufacturers.

If AB InBev’s initial approach to SABMiller succeeds, the resulting brewer, with a $275 billion market capitalization, could eventually buy Coca-Cola Co or PepsiCo analysts said. That would break down longstanding US barriers between the manufacture and sale of alcohol and soft drinks.

AB InBev is backed by private equity firm 3G Capital, known for a relentless focus on trimming corporate fat.

Coke or Pepsi could represent a fresh source of corporate bloat for 3G and its Brazilian stewards to target while also opening up opportunities to combine distribution channels, analysts said.

More consolidation within the packaged goods industry is already expected following the July merger of Kraft Foods Group Inc and ketchup maker H.J. Heinz Co, backed by Warren Buffett’s Berkshire Hathaway Inc and 3G.

While Coca-Cola, with a market value of $171 billion, is too big for AB InBev to buy, a larger, integrated combination of AB InBev and SABMiller could be well positioned to acquire Coca-Cola in three to four years, an industry banker said.

Coke’s size would become less of a hurdle to a potential deal over time, analysts said.

“Because companies are getting bigger with this potential acquisition, they’re allowed to dream even bigger,” said Ali Dibadj, an analyst at Sanford Bernstein in an interview. In an earlier research note, Dibadj also said the combined entity could buy Pepsi’s beverage business, with Kraft- Heinz potentially buying its Frito-Lay snacks business. Such possibilities could put more pressure on the soft drink makers, already struggling with dwindling demand for traditional soft drinks, to cut costs and increase sales, or eventually risk getting acquired. Coke and Pepsi declined to comment.

“Should a ( beer) deal ultimately be successful, the pace of consolidation that it symbolizes across the broader industry might well pressure Coca-Cola and PepsiCo to accelerate their own focus on delivering increasing top-line growth and cash productivity,” UBS analyst Stephen Powers said in a research note.

While Coke has historically been averse to combining soda and beer because of a belief that they address separate markets, companies elsewhere in the world, such as Japan’s Suntory Holdings, sell both categories as well as wine and spirits.

In the immediate term, the AB Inbev buyout of SABMiller may force soda companies to decide what happens with their bottling and distribution agreements with the two beer companies in international markets.

SABMiller handles bottling operations for Coke in seven markets including El Salvador and Honduras. In November, the companies agreed to combine bottling operations of their non-alcoholic, readyto-drink beverage businesses in Southern and East Africa.

Meanwhile, AB InBev has distribution agreements with PepsiCo in Latin America, including the exclusive right to bottle, sell and distribute certain Pepsi brands in Brazil.

Analysts said that it is unlikely that the combined entity would bottle both Coke and Pepsi products. “They’re competitors, Dibadj said. “Sharing of info and analysis and people across the bottlers isn’t typically supported by Coke and Pepsi.”

A beer merger would also provide opportunity for Molson Coors Brewing Co to gain increased exposure to the US market. Antitrust regulators are widely expected to oblige the new colossus to divest its stake in the joint venture created by Molson Coors and SABMiller, MillerCoors, to dilute what would otherwise be a 70 percent market share in the United States.