Mega-mergers brew up a taste for takeovers
Published 09/11/2015 | 02:30
As the Bible proclaims, there is a season for all things. So this must be the season for mega-mergers.
Low interest rates accompanied by cheap money is setting a climate where extraordinary feats of financial engineering are possible, including, as we have seen over the past weeks, the proposed coming together of two of the world's biggest brewing companies, ABinBev (AB) and SABMiller (SAB).
Even the dedicated beer guzzlers of the world might fail to understand the significance of this 'get-together,' but if you tell them it means Peroni, Grolsch, Miller, Fosters and Pilsner Urquell merging with Budweiser, Stella Artois and Corona, the seismic nature of the $100bn proposed deal becomes clear.
The new group will have almost 300 breweries around the world, 400 brands, and account for one in every three beers sold worldwide.
The deal will generate enormous savings and profits, but more importantly it will push for even more mega-deals in the brewing sector.
As one observer stated: "You'll always need an Airbus to compete with a Boeing." Consequently, other big players like Heineken and Carlsberg are going to have to look to their laurels.
The new brewing merger could take as much as a year to complete, as competition authorities in the US, China and Europe satisfy themselves as to completion concerns. In the US, the combined group will have 75pc market share, so divestment is inevitable.
The Chinese authorities' attitude will be interesting as the new company would have more than 40pc of the Chinese market. The view is that European authorities may not be as concerned, the only overlaps being in Italy and Poland. But individual companies in Europe will be keen observers.
SABMiller is itself the result of a merger between South African Brewery (SAB) and the number two US brewer, Miller. Its subsequent acquisitions appetite has been relentless. It acquired the second largest South American brewer, Bavaria and Fosters of Australia, but failed in its bid to acquire Heineken.
Today, the company is a global one with sales of $27bn and operating profits of $6bn. Geographically, the company generates one-third of its profits in Central America and a similar figure in Africa.
AB, which this column described as hyperactive and a high-profit and high-margin machine when we reviewed its performance several months ago, has also set new records for its acquisitiveness.
On average, it has merged every four years over the past 16 years. The company itself is the result of mergers between US, Belgian and Brazilian brewers. While a sprawling giant, the US is its critical market, generating almost half of its profits. Not unlike SAB, it has a comprehensive range of local brands in addition to its famous global brands. The proposed merger will be appraised by all competitors and not just those in Europe.
The Canadian brewer, Molson Coors, will be particularly attentive. Its joint venture with Miller, which markets Miller Lite and Coors Lite, will be part of the divestment. A conditional agreement is understood to have been reached with a rumoured price in excess of $10bn.
The US tobacco company Altria, maker of Marlboro cigarettes, with 25pc of SAB shares, was receptive to the bid. This is not surprising as last year SAB contributed $1bn to Altria's profits. Being part of a larger outfit will provide higher earnings.
Another party and SAB's second largest shareholder, Bev Co, is the investment vehicle of the Santo Dominico family from Colombia. Like Altria, it is taking the share alternative to cash and so avoiding punitive taxes.
Finally, SAB's management has agreed to come on board the $2bn sweetener in shares and options helps. While it is sad to see the loss of SAB, the deal is a good one for its shareholders, with a 50pc premium on its share price prior to negotiations.
Attention now turns to AB shares. If you have them hold them. If not, is the share worth following? Given AB's track record the answer has to be yes.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.