Deal decent for shareholders, but less choice for customers
ANHEUSER-BUSCH (AB) InBev has paid a reasonably full price for SABMiller which certainly passes some of the merger benefits to SAB Miller shareholders.
AB Inbev shareholders will be hoping that it can extract the planned benefits and overall for once I would have said it is a decent deal for both shareholders as AB InBev probably will extract the synergies and consolidate a declining market.
I say this because the majority of major acquisitions fail to extract planned synergies and more than half destroy value.
That said, AB InBev does have a good record with previous acquisitions. However,
The government and the PIC care about local ownership (admittedly only superficially, given the small fraction of SABMiller stock that was floating on the JSE) and the perception of local empowerment and job creation. Local fund managers, including the PIC, may be powerless to stop expect substantial redundancies and cost savings over the next year. Product ranges are also likely to be rationalised allowing greater investment in the retained brands.
However for the customer, one in three beers will be produced by AB InBev as a result of this merger, which suggests less choice and less competition.
The global beer market overall is largely flat and in some regions is declining as other beverages such as wine continue to penetrate. Microbrewers and their highly differentiated cask ales also continue to make progress. As a consequence cost, product and distribution rationalisation become an attractive way such a process but the government can get involved.
The government is not afraid of making things difficult for foreign investors – remember it is moving forward with legislation requiring a minimum 50 percent local ownership of securities services companies, of increasing shareholder returns.
In major manufacturing operations economies of scale can be enormous which means breweries will be rationalised to focus on the largest and most modern.
Scope economies will be substantial too as head offices and country management teams are likely to be rationalised. Combined purchasing power should also realise substantial savings. AB InBev has a reputation and demonstrable track record of being able to effectively extract these savings. and proposing legislation restricting foreign ownership of land.
Can they block a deal? Probably not if it is well-structured, and if InBev gives some concession to the CC or bilaterally. Can they delay it or make it more complicated – quite possibly and this is what I’ve tried to highlight here.
Do not underestimate the ability of government to “fiddle”.