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Posted June 2014

Belgium – Rumour mill going crazy that AB-InBev will buy SABMiller

It seems that, after the persistent rumour of the past couple of weeks, the question is not “if” but “when”. Analysts confirm there is definitely “smoke” here, which in the lingo of the financial world means that “Cowboys” are facing off with a bunch of “Indians” (the former – cowboys - referring to the big investment banks).

If the deal were to go ahead, it would represent an “industry transformational transaction”, observers say. By buying the global number two brewer, AB-InBev would control over 30 percent of global beer volumes, thus widening the gap to both Heineken (currently ranked third) and Carlsberg (ranked fourth) with a combined 15 percent volume share.

As we wrote last month (“AB-InBev’s need for SABMiller mega-deal grows”), the current spate of “Big Deals” in various industries is not about synergies or cost savings but mainly about growing bigger. This would also hold true for an AB-InBev-SABMiller tie-up. Analysts have long argued that it would not produce many synergies nor would potential savings be high.

It would thus epitomise a major departure from AB-InBev’s rationale in earlier deals, which were all about buying undermanaged assets cheaply and running them better. The short-hand for such transaction is “value deal”.

The Brazilian investors in AB-InBev have a long record in doing “value deals”. Remember their original purchase of Brahma, the subsequent merger between Brahma and Antarctica in Brazil to form AmBev, the InBev deal in 2004, the Anheuser Busch deal in 2008 and the Modelo deal in 2013 – they all aimed at extracting higher profits quickly. SABMiller do not meet this criterion, in our view, as they have a strong operating culture and profits per hl in many of SABMiller’s markets are already high.

Of course, there would still be plenty of goodies for AB-InBev in such a deal. Given that they are all near-monopolies, SABMiller’s Latin American markets, especially Colombia, would fit very well as would South Africa.

Although AB-InBev refrained from buying Foster’s beer business CUB in Australia (as it was overpriced), once they own SABMiller they could improve CUB’s bottom line by taking the Corona franchise away again from CUB’s competitor Lion in order to push the brand themselves.

From what we at Brauwelt International have heard, AB-InBev are trying to raise USD 60 billion in cash to finance the transaction. This indicates to us that SABMiller could be valued at about USD 120 billion or at a 30 percent premium to its current market capitalisation of USD 94 billion. That AB-InBev will only get SABMiller at an attractive premium is beyond doubt. SABMiller’s shareholders are not desperate to sell, much like Anheuser-Busch’s shareholders and Modelo’s. The premium could go higher (perhaps up to 50 percent, as some analysts say) depending on how well SABMiller play their cards.

Another way to arrive at the transaction value of roundabout USD 120 billion is to take SABMiller’s 2014 profit (EBITDA) and multiply it by 15 or 16. That seems to be the going rate for lucrative brewing companies these days. Readers will recall that last year AB-InBev paid a multiple of 15.4 times profit for Modelo.

The reason we think that AB-InBev are only raising USD 60 billion is that the deal will not be an all-cash transaction. We have always assumed that SABMiller’s two major shareholders, the cigarette company Altria and the Colombian Santo Domingo family, which sold the Colombian brewer Bavaria to SABMiller in 2006, would not want to exchange their stakes in SABMiller for cash. Together they control 41 percent in SABMiller.

We believe they would be more than willing to take a stake in “MegaBrew”, as the combined AB-InBev-SABMiller has been dubbed by the financial markets. Just think: Why would they want to sell out now? What would they be doing with all those billions in cash? Right: They would have to find another profitable investment. In our times and age, which investment appears more secure and profitable than MegaBrew? In the case of Altria, we understand that, if Altria were to sell its stake for cash, it could trigger a large capital gains tax liability in the United States. That would make a share deal more attractive for Altria.

As far as we can see, the deal will face very few anti-trust issues. There are only two roadblocks, namely the stakes of SABMiller in the U.S. and China. In the U.S., with a combined 80 percent market share, we would expect MegaBrew to have to divest the 58 percent stake in MillerCoors to Molson Coors. Same in China. SABMiller’s joint venture China Snow is number one and AB-InBev are number three. We don’t think that the Chinese anti-trust authorities will want Megabrew to have a stake in the Chinese beer market in excess of 30 percent. That’s why we anticipate that the group will have to sell its 49 percent stake in CR Snow back to its partner China Resource Enterprises.

Analysts say that selling the MillerCoors stake could raise USD 9 billion, while the CR Snow stake could raise about USD 4 billion.

Less clear are AB-InBev’s intentions in Africa, where SABMiller work closely together with France’s Castel Group, which is private. The Castel beer business, in which SAB have a 20 percent stake, already contributes a sizeable share to SABMiller’s profits in the region. Many analysts are curious how Mr Castel will view a change of partner and culture. As rumours have been plentiful of the octogenarian Mr Castel eventually selling out, we suppose that Jorge Lemann, the multi-billionaire shareholder of AB-InBev, should not find it too difficult to persuade Mr Castel (both are Swiss residents and both made their fortunes in their lifetimes) to accept a big put-option, which would give Mr Castel the right to sell out to AB-InBev at some point.

This leaves us with only one question mark: what will become of SABMiller’s 24 percent stake in the Turkish Efes Group, which SABMiller obtained in 2012 following the transfer of their Russian and Ukrainian beer businesses to Efes? If AB-InBev and Efes were to combine their businesses in Russia, that would give them a 28 percent beer market share and perhaps more of a lever to compete against Carlsberg-owned Baltika. However, the Russian beer market has been in decline for years both in terms of volumes and brewers’ profits and the future does not bode well either. Therefore, if Efes were to buy back SABMiller’s stake and perhaps even take over AB-InBev’s eastern European assets, AB-InBev should not be too upset.

As said, at this stage, the AB-InBev-SABMiller deal is merely rumour, albeit a loud one. Also, we have no genuine insight into how the deal, should it ever come about, will be structured in detail. All the above is merely our conjecture.

But if it does happen, it will underline two things: that big money is just about big money and that beer in all this merely figures, well, as an underlying product.

On a final note, once SABMiller will be gone, the beer monopoly will be well and truly over.

 

Australia – Pubs a goldmine for big brewers and a coalmine for craft brewers

Craft beer sales may be on the rise in Australia, but craft beer brewers are still struggling to make serious inroads into the lucrative on-premise sector. Why? Because they suspect that the country’s two big brewers have managed to protect their dominance over the beer taps of Australia's pubs and bars.

Now the Australian competition watchdog (ACCC) has decided to sniff the sector out, conducting a confidential investigation into the draught beer market, initially targeting the major beer consuming state – New South Wales - with visits to numerous brewers and publicans in the past few weeks.

Whether anything “revolutionary” will come of this investigation into sales exclusivity contracts (as they are usually called) remains to be seen.

Perhaps I am a tad more pessimistic than others as a recent complaint against this practice in Mexico led to very few regulatory changes – something the ACCC must be aware of.

In Mexico it was a protest by SABMiller and some microbrewers that got the antitrust authorities going. Like Australia, Mexico is a beer market duopoly: in this case by AB-InBev and Heineken.

Last year, the Mexican antitrust authority ruled that brewers must limit exclusivity agreements in the on-premise sector to 25 percent of their total points of sale, gradually reducing that to 20 percent by 2018. Analysts deemed this “not that harsh” for the big brewers because existing contracts that typically last three to five years were allowed to run their course.

What is more, restaurants and bars only account for around 15 percent of beer sales in Mexico, it was reported. The bulk of beer sales – about 50 percent - is channelled through corner stores, many of which agree to sell only one of the two brands in exchange for beer-logo awnings, signs or refrigerators, as well as discounts, credit or assistance with local permits, the Wall Street Journal wrote at the time. Incidentally, the anti-trust authority decided to turn a blind eye on this.

The situation in Australia appears to be somewhat similar to Mexico, although Australia’s on-premise sector would be much more valuable than Mexico’s, at least relatively speaking. Read on

 

Australia - Moët Hennessy cut out the middle-men

The recent decision (May 2014) by French luxury goods company Moët Hennessy to launch a new e-commerce site that sells the company’s entire portfolio of wine and spirits directly to the public has been met with outrage by liquor retailers, Australian media report.

The new website, www.moet-hennessy-collection.com.au, offers competitive pricing on the company’s full range of luxury alcohol brands with metropolitan delivery times of one to three days.

Moët Hennessy defended its decision by saying that there is an “irreversible trend” of consumers seeking direct connections with luxury brands online.

Since the Moët Hennessy Collection’s products are often used as gifts, selling them to consumers does not compare with a “grocery model”, meaning people don’t buy them like washing powder. Hence traditional retail channels have become less and less important.

Moët Hennessy also stressed that they have no intention of getting rid of their retail partners. They reportedly said they see their own online platform as something that is “complementary and incremental”.

So why are the liquor retailers not convinced? Read on

 

USA – Anheuser-Busch and Miller Coors reveal their beers’ ingredients

It’s no big secret, really, what goes into their beers. Still, the country’s two major brewers, AB-InBev and MillerCoors, on 13 June 2014 decided to respond to a food blogger’s online petition and update their websites to include a fuller list of the ingredients used in making their beers, U.S. media reported.

Two days previously, the food blogger Vani Hari had petitioned on FoodBabe.com, demanding to know the key ingredients of these major brewers.

Following her petition, AB-InBev listed the ingredients of two of their best-selling brands Budweiser and Bud Light on the website tapintoyourbeer.com. The identical constituents of both the beers were water, rice, yeast, barley malt and hops.

Likewise, MillerCoors unveiled the components of many of their brands like Coors Light, Miller Lite and six other brands on their Facebook page. The ingredients they use are basically the same, with the exception of rice being replaced with corn. Read on

 

Germany - Micro plastic allegedly found in bottled water and beer

What a squib. On 2 June 2014 German public media NDR.de reported that hazardous microplastics have been found in Germany’s best-selling mineral water and beer brands. How did the public react? They probably opened another bottle of beer.

The TV broadcast claimed that German mineral waters and beers are partly contaminated with microscopically small plastic fibres. According to researchers enlisted by the programme, these microplastics can originate from textiles, from so-called fleece. Fleece itself is made from recycled plastic bottles. These fibres seem to make it into the environment through waste water. How they are supposed to get into the beverages was not really explained. The programme said further that these microplastics can be found in the best-selling beer and water brands.

According to the programme, microplastics are an environmental issue. Whether they pose a risk to humans scientists don’t know yet.

When the programme makers approached the German Federal Ministry for the Environment and the Federal Ministry of Food, both said that the issue did not fall within their authority and referred the journalists to the other department.

The German Brewers’ Association was quick to respond and said that research by the Technical University of Munich had found no such fibres in the beers and mineral waters in question.

If the programme makers thought that by scandalising the issue of microplastics in German beer and mineral water they could draw the public’s attention to a much more pressing environmental problem – that of microbeads – they were misguided.

Which is unfortunate. Because microbeads are a problem. Microbeads can be found in toothpaste, facial scrubs and shower gels. Environmentalists say that one bottle of facial cleanser may contain as many as 300,000 plastic microbeads, which are used to help exfoliate and cleanse the skin. While these beads are harmless to human health when used as part of a beauty regimen, once they’re flushed down the drain, they can clog up local waterways because they are too small to be sifted out at sewage treatment plants.

As the Guardian newspaper wrote in 2012, microbeads now bob around the high seas where the plastic becomes a persistent pollutant. As sea temperatures are low, plastic does not biodegrade; it is also ingested by wildlife. How could they avoid it? In some seas plastic fragments are more plentiful than plankton.

Seems like Germany’s publically funded TV hacks defeated their purpose.

 

USA – AB-InBev did not water down their beers

As was expected, a federal judge on 2 June 2014 dismissed lawsuits that claimed AB-InBev had watered down several of their beers. Many observers had commented that the issue was a non-starter right from the beginning – or why would AB-InBev do anything so daft as to break labelling laws?

Judge Donald Nugent of the U.S. District Court for the Northern District of Ohio, Eastern Division, said as much when he told the plaintiffs that AB-InBev's labelling fell within federal guidelines, which state that beers can have a tolerance of 0.3 percent above or below the amount printed on the label, according to the St. Louis Post-Dispatch on 4 June 2014. Read on

 

USA - Anheuser-Busch try to stem market share decline through distribution deals

The good news first for craft brewers: the city of Portland, Oregon, has become the craft beer capital of the United States. During the first quarter 2014, Portlanders drank more craft beer than one of Anheuser-Busch’s or MillerCoors’ big-name brands combined.

In the 52 weeks to the end of March 2014 craft beer jumped 3.8 percent to reach 45.8 percent (in dollar sales) in Portland’s off-premise sector. Although Oregon has over 130 breweries, the top seven craft brewers in Portland control 26 percent of supermarkets’ beer sales by value. This rise came at the expense of the big brewers. AB-InBev and MillerCoors now only have a combined 40.6 percent share of dollar sales. MillerCoors stood at 23.7 percent and AB-InBev at 16.9 percent, Beer Marketers Insights reported on 30 April.

With Portland being the hometown of West Coast bohemians – at least every other male in Portland cuts his own hair, sports a beard, wears iconic 80's clothes and rides a bike – the rising preference for craft beers should not really come as a surprise.

The worrying news is that AB-InBev are using their distribution muscle in Portland to ease out other craft beer brands. As was reported by the St. Louis Business Journal on 30 May 2014, AB-InBev bought the Portland-based Morgan distribution company in January this year. Subsequently they merged it with the Eugene-based Western distribution company, which they had already acquired in 2012, and then broke ties with the small craft-beer brands distributed by Morgan.

The move, says the St. Louis Journal, is part of the beer giant's strategy to expand the reach of its own craft-style labels, which include Chicago’s Goose Island and New York’s Blue Point Brewing. By owning distribution in Portland, AB-InBev have an avenue through which to introduce their brands to consumers. Read on

 

USA - Diageo to build a USD 115 million distillery in Kentucky

A new destination on the Bourbon Trail: The world’s number one drinks group Diageo plans to build a new distillery in Shelby County, northern Kentucky, media reported on 30 May 2014. Finalization of the plans is still subject to approval by local government, though.

If approved, this will represent an investment of USD 115 million (EUR 85 million) over the next three years. The distillery, which is to be fully operational by 2016, will have a capacity of 1.8 million proof gallons, or 750,000 nine-litre cases, and will distil bourbon and other whiskies.

The announcement comes as bourbon, most of which is made in Kentucky, continues to boom. Bourbon is currently the fastest growing spirits category in the U.S. retail sector, enjoying 14 percent value growth for the latest 52 weeks (to 26 April 2014) according to IRI. This popularity is mirrored globally, with the super-premium price segment growing 24 percent between 2009 and 2012, says IWSR. Read on

 

Australia – TWE amid takeover rumours

No” was the word most frequently used by Australia's Treasury Wine Estates’ PR in May. “No”, the world's number two wine company was not in talks to be acquired by China's Bright Food Group. And “no”, it had not been approached by either Pernod Ricard or Constellation Brands for its U.S. business.

Treasury Wine Estates (TWE), spun off from the Fosters Group in 2011, has been considered a takeover target since late 2013 when it slashed earnings forecasts, ousted its CEO and revealed that its U.S. arm was forced to destroy wine because of oversupply. Its portfolio, which includes the Beringer and high-end Penfolds labels, makes it especially attractive for companies hoping to capitalise on growing demand for luxury goods in Asia as the region's middle class expands, media say.

TWE, though, confirmed that it had received an AUD 3.1 billion (USD 2.9 billion) takeover bid from U.S. private equity firm Kohlberg Kravis Roberts – which it rejected. Read on

 

Poland - SAB Miller unit KP expects recovery of beer sales this year

Kompania Piwowarska (KP) has stated that it expects beer sales to rise this year thanks to the 2014 Football World Cup. The brewer, which is Poland’s number one and a unit of SABMiller, produces popular brands such as Lech, Tyskie, Redds and Zubr. At the end of May 2014 KP reported that its sales dropped by as much as 9 percent in its 2013/2014 financial year (31 March 2014), while the overall beer market only declined by 2.5 percent to 37.3 million hl.

The brewer believes the Polish beer market will grow to 37.9 million hl by year-end.

KP witnessed a market shift of beer consumption from restaurants to retail. Other market trends included the growth of the premium and super-premium brands, and a decline of the mainstream segment.

Poles drink 100 litres of beer annually, new data by the Central Statistical Office show, giving them a place among the top 5 beer drinking nations. The Polish beer market has grown impressively since the 1990s. In the first decade of the 21st century, the consumption of alcohol in Poland increased by 30 percent, with half of this growth generated by beer, making it the most frequently consumed alcohol in Poland, the Polish Ministry of Treasury reported on 23 May 2014.

There are currently 97 breweries across the country, but production centres around three big companies, which control over 85 percent of the market.

The biggest beer producer is KP with a 38 percent market share. The second biggest beer maker in Poland, which owns the Żywiec, Warka and Tatra brands, is Heineken-controlled Grupa Żywiec, with a market share of about 30 percent. Ranked third is the Carlsberg group, which owns brewers Okocim and Kasztelan, with a market share of around 20 percent.

The rest of the market belongs to smaller companies producing niche, craft or regional beers and to the growing number of microbreweries. The development of this small but dynamic segment of the market can be exemplified by the number of new breweries opening up in Poland: 21 in 2013 alone.

With the boom in microbreweries comes a marked shift from traditional lager towards niche brands. Although the market declined last year, both small and big brewers that offer craft or flavoured beers have recorded two-digit growth rates in these segments. The flavoured beers segment alone has gone a long way from a market share close to zilch in 2011 to 11 percent in 2013. The sub-segment of Radler, a mix of lemonade or juice and beer, has achieved the highest growth rate of 10 to 20 percent, according to Carlsberg.

Danuta Gut, Director of The Union of Brewing Industry Employers in Poland, was quoted as saying: “Years of investment in education about the culture of beer have borne fruit, not only by forming a group of beer experts, but also by creating a large group of beer enthusiasts. Today, customers expect something more, including novelty, and there’s a lot of room in the market for novelty.”

 

UK - Scotland is better off as part of the EU says Diageo’s CEO

Ho ho. Finally someone from the secretive world of business has come out of the woodwork and entered the debate over Scotland’s independence. On 30 May 2014 Diageo’s CEO Ivan Menezes broke cover and reportedly said that it is “extremely important” that Scotland remains part of the EU, both for Diageo and for the Scotch whisky industry as a whole.

The drinks group Diageo is one of Scotland's biggest employers and Mr Menezes has always maintained in the past that the decision was for “the people of Scotland to make”. But he went further this time, pointing out the importance of EU membership for Scotland because of the benefit from “free-trade agreements around the world”.

Scotland’s EU membership is not really something Scots will vote on directly in September. But there has been much rumour and talk, especially by opponents of Scottish independence, that once Scotland secedes from the UK it might not be allowed to remain in the European Union with all the trade advantages membership brings, and that the country could be plunged into currency chaos.

All Scottish residents aged 16 and over can vote on 18 September this year on whether Scotland should end its 307-year-old union with England and leave the United Kingdom. If a majority vote in favour, Scotland will become independent on 24 March 2016.

May 2014 polls in Scotland showed that a majority of 47 percent would vote against independence. Support for independence was at 40 percent, with 13 percent undecided.

Perhaps, more Scots could be persuaded to join the pro-independence camp following the overwhelming victory of the populist, right-wing United Kingdom Independence Party (UKIP) in the EU elections in May.

UKIP leader Nigel Farage has long said he wants the UK to quit the EU. UKIP’s EU election victory has also put pressure on Prime Minister David Cameron to honour his pledge that he will hold an “in-out” referendum on the EU by 2017 if he remains prime minister after the next general elections in 2015.

If Scotland’s EU membership looks doubtful, so does the UK’s. But at least Scotland may stand a chance to rejoin the EU should they go independent in September. At any rate, this is what Diageo hopes.


USA – The Katz v. Anheuser-Busch pay gap trial: a fizzler?

After a jury in St. Louis had decided that brewer Anheuser-Busch did not engage in gender discrimination when it determined how much Francine Katz, a former senior PR executive with the company, was going to be paid, the St. Louis Business Journal on 23 May 2014 ran a piece that looked at the wider implications of the pay gap trial.

Although the case involved a major corporation – Anheuser-Busch (A-B) – and serious dollars – Ms Katz was asking for USD 9.4 million in back pay plus USD 4.9 million in interest and an undetermined amount of punitive damages - the trial did not capture much media attention outside St. Louis. That may have been the most remarkable outcome of it all. Read on

 

UK - Waitrose unveils 2014 Home Brew Challenge

Homebrewers take note! On 29 May 2014, the UK supermarket group Waitrose announced that it has teamed up with craft brewery Thornbridge and home brew supplier Brew UK to find the UK’s best home brew. In 2011 Thornbridge launched the first Home Brew Challenge.

The winner of this year’s competition will see its beer appear in 60 Waitrose supermarkets from October 2014. All beer entries need to be submitted by 31 July 2014 to the Thornbridge Riverside Brewery in Bakewell. If a beer is chosen by Waitrose for national distribution, the winning brewer will be asked to give their recipe to Thornbridge. The winning brewer will be invited to Thornbridge for the inaugural brew. Read on

 

Australia – SABMiller’s top brands decline

Is it because Australian beer drinkers are shunning traditional brands that SABMiller on 23 May 2014 had to report that three of its top Australian brands have witnessed declines in volumes over the past year? “Victoria Bitter [better known as VB] declined by one percent and Crown Lager declined, reflecting both a strong prior year comparative and price compression from imported brands,” SABMiller said in its March 2014 full year results, released on 23 May 2014.

However, SABMiller insisted that the long-term prospects were good for its Crown Lager and Victoria Bitter brands, despite some negative reaction to the new Crown Lager recipe. Observers say that there has been a marked flavour change since Crown Lager went all malt. Apparently, it now has a strong DMS vegetable note that would have been anathema to old school CUB brewers. Read on

 

India – Diageo wants a larger stake of United Spirits

Global drinks group Diageo has received regulatory approval for an open offer to acquire a 26 percent stake in United Spirits for an estimated Rs 114.48 billion (EUR 1.4 billion/USD 1.9 billion), it was reported. This is the second open offer made by Diageo to gain majority control in India's number one spirits group. Read on

 

 

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