SABMiller remains solo as consolidation sweeps the brewing industry

As Inbev sets to work digesting the blockbuster $52bn (£26bn) acquisition of Anheuser-Busch – the biggest deal in brewing – the industry lies in wait for the next round of consolidation.

Despite there being little to suggest a takeover of SABMiller, the largest brewer before Inbev’s deal with A-B, or a possible merger with Heineken, which earlier this year finalised with Carlsberg the joint takeover of Scottish & Newcastle, the brewing industry seems caught up in a wave of consolidation as pressures mount to trim costs. As such, observers predict it won’t be too long before SABMiller gets together with a rival.

But sources suggest there will always remain an anxiety about being the lead player in a market that is experiencing shrinking growth. In response, brewers are focusing on operating more efficiently and making sure their brands are marketed well and are profitable throughout all its markets.

“Combining the forces of Inbev and A-B is not terribly good news for SABMiller, because it will make competition tougher, especially in the US and Latin America, though to a lesser extent in Europe and Asia,” says Sam Hart, an analyst at Charles Stanley.

He adds that the combined business will benefit from economies of scale and provide “formidable competition” at a time when costs of raw materials such as wheat and barley are on the rise.

A fact not lost on SABMiller, which late last year entered into a joint venture with MolsonCoors in the US to boost its position against Budweiser brewer A-B. The move, regarded as “bad news” for Anheuser at the time, prompted intensive speculation about the Inbev/A-B merger. Yet, even as Inbev was earlier this year making unsolicited advances towards A-B, SABMiller is reported to have let Inbev know it would be open to a bid from the Belgian giant, should its takeover offer be rebuffed by the US brewer.

Now SABMiller says it sees Inbev’s takeover of the producer of Bud as a potential advantage and insiders say the business is far from decimated.

A SABMiller spokesman says: “We don’t believe this transaction changes the competitive dynamic in any market outside US and China. We believe this is a potential opportunity for our new drinks venture (with MolsonCoors) to capitalise on any disruption in the A-B system.”

Analysts also say SABMiller has the chance to strike and increase market share of its Miller brand in the US while Inbev and Anheuser’s attention is diverted in wrapping up their deal.

Euromonitor senior drinks analysts Jeremy Cunnington says he would not be surprised if the deal with MolsonCoors becomes “full blown” because the partnership would also help to strengthen SABMiller’s position in Europe.

But it has never been SABMiller’s style to do deals on a grand scale. Formerly known as the South African Breweries Limited, it was founded in 1895 and embarked on an aggressive programme of overseas expansion in the post-apartheid era, initially concentrating on the emerging markets of sub-Saharan Africa. It first entered central Europe in the early Nineties, followed by China, India and Central America. By the early 2000s, SAB was the number two brewer in China and produced two-thirds of all beer in Africa.

In July 2002 it acquired Miller Brewing Company, the number two US beer producer, and renamed itself. That move into the developed world was followed by a second, the June 2003 purchase of the majority control of Birra Peroni, Italy’s second-largest brewer. It has since been busy acquiring regional breweries in countries such as China and Russia.

“SABMiller has grown its business by buying up breweries around different regions of the world,” adds Cunnington.

“Also, there is very little scope for a mega deal, particularly in Western Europe. So it does put some sort of pressure on SABMiller because even if Western Europe does not offer huge growth opportunity, it does provide higher margins than, say, China.”

He continues: “This means that markets such as the US and Europe continue to generate cash needed to invest in the growing markets.”
Charles Stanley’s Hart says: “Its management has had a good track record of making disciplined, if not significant, acquisitions and as the leading international brewer it has had the largest exposure to emerging markets and has therefore very good long-term prospects. But the new combined forces of Inbev and A-B will try to consolidate their position in the emerging markets.”

SABMiller, with its headquarters in the UK, operates from 60 countries, producing brands such as Grolsch, Pilsner Urquell, Peroni, Carling Black Label, Miller and Miller Lite. However, its impact in the UK has been almost insignificant compared with its ambitions in the US and emerging markets.

“SABMiller has never been terribly interested in the UK market, where lager volume has been declining for a number of years – and with the smoking ban and increased taxation it is not a particularly attractive market either,” adds Hart.
Another analyst says that although SABMiller “doesn’t give a monkeys about the UK market” it will at some point respond to the biggest brewing deal in history, and “enter conversations with Heineken”.

But an insider says that SABMiller does not feel the “need to retaliate” and will continue to focus on the deal with MolsonCoors in the US, where the brewer is likely to increase its investment to cash in on the world’s most profitable beer market. The venture will mean 69 million barrels of annual beer sales and $6.6bn (£3.3bn) of revenue in the US.

Meanwhile, it also appears to be waiting for A-B’s stake in China’s biggest brewer, Tsingtao, to come up for grabs. It is understood that the Chinese Government may challenge the Inbev/ A-B merger on anti-trust grounds. A-B’s presence in China includes a 27% share in Tsingtao and Harbin brewery. Inbev also has partnerships with smaller players in the Chinese market, a fragmented industry with roughly 400 brewers.

The importance of China in brewing has been underlined by the latest Euromonitor report which says global beer volumes are expected to increase by over 28 billion litres between 2007 and 2012, driven by emerging markets and led by China.
SABMiller is also expected to buy-out French brewer Castel on the African continent, with which it is a partner in several countries.

While SABMiller continues to extend itself in emerging markets, analysts do not see how volatile demand and slim margins in these regions could prevent the brewer from the inevitable. Expect the significant deal-making trend to continue.