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Posted October 2015

 

United Kingdom – SABMiller: a parting view

As AB-InBev and SABMiller hammer out the final terms of their deal and the beer industry catches its breath from Tuesday’s ground-breaking USD 104 billion offer, it’s time to congratulate SABMiller’s feisty Chairman Jan du Plessis on a job well-done. He managed to squeeze as much out of AB-InBev as was possible.

SABMiller, in case it needs pointing out again, has an excellent record and could have continued on its own, had its major shareholders not succumbed to the lure of money. SABMiller, says The Guardian, is not a Cadbury Schweppes, struggling to defend its chequered returns when Kraft came calling in 2009. It is the world’s number two brewer and has only enriched its shareholders during its 16 years on the London stock market. It did not need a saviour.

Therefore, the ultimate demise of SABMiller is not down to a poorly executed strategy but to fate. SABMiller will be taken over because it has always been a sitting target. Read on

 

United Kingdom – SABMiller agrees to improved bid by AB-InBev

That’s it. Bye bye SABMiller. On 13 October 2015, it was announced that SABMiller has agreed to sell itself to AB-InBev for USD 104 billion, in a deal that will be the biggest takeover of a UK-listed company in history.

The transaction will create a global brewer that will make about 30 percent of the world’s beer. AB-InBev is the world’s number one brewer and SABMiller ranks second.

In removing a global competitor forever, the deal will be “transformational” in the true sense as it will leave the global beer market with only one dominant player and a very fragmented balance. In terms of global beer volumes, the next-ranking Heineken and Carlsberg will control 9 percent and 6 percent respectively.

The boards of the two companies said they have reached agreement “in principle” on the key terms of a “possible recommended offer” after SABMiller rejected four offers by AB-InBev over the past month.

SABMiller reported AB-InBev is proposing to pay GBP 44 a share in cash. For tax reasons it also offered a partial share alternative structure for 41 percent of the company owned by SABMiller’s two biggest shareholders – the cigarette maker Altria and BevCo, owned by Colombia’s billionaire Santo Domingo family.

AB-InBev’s approach initially split the two big shareholders. Altria, with a 27 percent stake, told SABMiller to enter talks last week but the Santo Domingos, with 14 percent of the shares, sided with the board in rejecting AB-InBev’s earlier approaches.

In the end, the Santo Domingos’ stubbornness paid off handsomely as it forced AB-InBev to increase its offer from GBP 42.15 per share to GBP 44.00.

The GBP 44 cash offer represents a premium of about 50 percent over SABMiller's share price in mid-September, before the bid battle started.

In a high-suspense poker game last week, tempers were rising on both sides because under UK takeover rules AB-InBev had until 5pm tomorrow to lodge a formal bid or walk away.

SABMiller has now asked the takeover panel for an extended deadline so the two firms can work out the details. The new deadline for AB-InBev to make a firm offer is 28 October 2015.

According to media reports, SABMiller has negotiated a USD 3 billion break fee payable by AB-InBev if the deal falls through because of competition hurdles or opposition by AB-InBev’s shareholders. The final deal still needs approval by AB-InBev’s board.

 

USA – Antitrust watchdog to investigate AB-InBev's competitive edge

Regulators are having a busy time looking into allegations that brewer AB-InBev is limiting competition from craft brewers by buying distributors, media reported on 12 October 2015.

In the past few months, the world’s number one brewer has shocked the craft beer industry when it struck deals for five distributors in three U.S. states. Because of the Three Tier System, many U.S. states require brewers to use distributors to sell their product. Once AB-InBev buys a distributor, craft brewers say they find that they cannot distribute their beer as easily and sales growth stalls. There were some 4,000 craft brewers as of September this year.

Media say that AB-InBev is already the second-largest distributor in the country behind the Reyes Beverage Group, self-distributing over 100 million cases beer (8.5 million hl) or 10 percent of its volume. For the rest, AB-InBev relies on a network of over 500 distributors. Read on

 

Netherlands – Heineken and Diageo further cut their business ties

Is the recent asset swap between Heineken and Diageo a sign that brewers’ promiscuous days are over? Diageo and Heineken announced on 7 October 2015 that they have agreed to unbundle their ownership ties related to their beer businesses in Ghana, Jamaica, Malaysia and Singapore, resulting in a cash payment of USD 780.5 million to Diageo.

The move is the latest in a series of similar restructuring moves by Diageo, which sold its South African and Namibian assets to Heineken for GBP 128 million (USD 195 million) in July 2015.

This time, Heineken is seeking to consolidate its beer businesses in Southeast Asia and the Caribbean, while Diageo will come away with fuller control of Guinness Ghana Breweries Limited. Read on

 

Canada – AB-InBev’s unit Labatt buys craft brewer Mill Street

So they are after craft brewers across the border too. The Toronto-based Mill Street Brewery, one of Canada’s largest craft brewers, was bought by AB-InBev’s local unit Labatt, media reported on 9 October 2015.

As in the U.S., the ensuing outcry was, in Canadian self-effacing terms, quite loud. Known for its organic beers, Mill Street is the second largest independent craft brewer in Ontario, brewing an estimated 100,000 hl beer.

Canada defines a craft brewer similarly to the U.S.: the three basic tenets are small (in Ontario, home to Mill Street, under 400,000 hl beer), traditional (no corn syrup or rice extract), and most importantly, independent. With the purchase by Labatt, Mill Street will no longer meet one or more of these criteria.

Although financial terms were not disclosed, under the agreement Mill Street will continue to operate as a stand-alone company as it looks for ways to expand production and capacity. Labatt said it plans to invest CAN 10 million into the company's existing brewery operations. Read on

 

USA – Old wooden tanks put to new use by Bell’s brewery

Bell’s from Kalamazoo, Michigan – the eighth largest U.S. craft brewer - has released its first beer fermented in wooden tanks, which were once used by the long-defunct Stroh brewery in Detroit, media reported on 6 October 2015.

The beer, named Andrews’ Ale, is inspired by the traditional English-style Extra Special Bitter. Bell’s uses a semi-retired malt variety, Chevallier, that was popular in England in the 19th century. Read on

 

United Kingdom – An irate AB-InBev makes public offer for SABMiller

At long last. On 7 October 2015 AB-InBev announced that it wants to acquire SABMiller for GBP 42.15 per share in cash, which would value SABMiller, including debt, at GBP 72 billion (USD 110 billion).

AB-InBev also said that it has made two prior written proposals in private to SABMiller, the first at GBP 38.00 per share in cash and the second at GBP 40.00 per share in cash.

Arguing that the revised proposal is highly attractive for shareholders, AB-InBev stated that it is “disappointed that the Board of SABMiller has rejected both of these prior approaches without any meaningful engagement.”

The offer is certainly high and already in the “realms of value destruction” according to some analysts.

But what is interesting to note here is that AB-InBev has adopted a threatening posture, while SABMiller outwardly shows no signs of wanting to surrender.

In its public statement AB-InBev claims it has the support of SABMiller’s biggest shareholder, the cigarette maker Altria, for the proposed offer and that it expects SABMiller’s second-largest shareholder, BevCo, which is the Colombian Santo Domingo family’s financial vehicle, to back the proposal.

Apparently, this is not the case. SABMiller’s two biggest shareholders are split over AB-InBev’s latest bid. Only hours later, AB-InBev was forced by the UK’s Takeover Panel to clarify that it does not have the support of BevCo.

In its reply, SABMiller said that an offer of GBP 42.15 “very substantially” undervalues the London-listed brewer. In the M&A world, the choice of the term “substantially” is code for the underlying message that a company is seeking an offer that is at least 10 percent higher.

It has since transpired that two days previously, AB-InBev’s CEO Carlos Brito had put forward a GBP 40.00 per share offer and informally had let it be known that AB-InBev might increase its offer to GBP 42.00. Then already SABMiller’s board decided that even the informal offer was not enough. Huffing indignantly, SABMiller’s board pointed out the obvious and said that the most recent offer is barely higher than the informal one.

Apart from the unattractive price, the new offer is highly conditional.

In a statement to the London Stock Exchange, SABMiller said: “AB-InBev needs SABMiller but has made opportunistic and highly conditional proposals, elements of which have been deliberately designed to be unattractive to many of our shareholders.”

Since in a takeover battle, financial aspects are as important as psychological manoeuvers, AB-InBev’s latest move suggests that it now seeks to put pressure on shareholders and circumvent the SABMiller board.

This is likely to frustrate the SABMiller board and they will either cave in, or dig in and reject.

If AB-InBev succeeds in taking over SABMiller, it would be the third most expensive M&A transaction in history, according to Dealogic.

 

United Kingdom – Will risks outweigh the benefits of Megabrew?

As the talks between AB-InBev and SABMiller drag on, more and more critical voices can be heard via an all too willing international media, arguing that the drawbacks in this transaction would counter the advantages.

For one, buying SABMiller, which has operations in around 80 countries, will be a much more complex transaction for AB-InBev than its previous two deals - its 2008 acquisition of U.S. brewer Anheuser-Busch and its 2013 takeover of Mexican brewer Grupo Modelo.

For another, the assumed high price AB-InBev will have to pay for SABMiller could lead to value destruction. The RBC analyst James Edwardes was quoted as saying that an offer for SABMiller of GBP 42 a share (totaling about USD 103 billion) or higher would bring the deal into the “realms of value destruction”. Read on

 

USA – Why big companies like AB-InBev are not prompt payers

For the cognoscenti, it’s just a metric by the name “negative cash conversion cycle” but it basically measures the time gap for a company between taking in cash from customers and paying its suppliers. Delaying payments to suppliers has apparently become fashionable. As Stephanie Strom reported in the New York Times in April this year: “In the past, extended payment terms often were a signal that a company was experiencing worrisome cash flow problems, but these days big, robust companies are imposing new schedules on suppliers as a business strategy.”

An article by Bloomberg (30 September 2015) argues that it was the Brazilians behind brewer AB-InBev who made the tactic popular. The old Anheuser-Busch was not immune to it either. In 2007, says Bloomberg, Anheuser-Busch got paid eight days before it paid its suppliers, on average. But in 2014, the gap for AB-InBev was 176 days.

For a private equity firm such as 3G [the private equity vehicle set up by the Brazilian shareholders of AB-InBev], cash is king, so getting it sooner and paying it out later is something to strive for”, says Bloomberg. Read on

 

Australia – Ashai takes over craft brewer Mountain Goat

Funny that. Asahi seems to value craft beer in Australia but cannot develop the category at home, where craft beer accounted for less than 1 percent of sales in 2013. Not so in Australia, where craft beer is a growth category. No wonder, on 28 September 2015 the Japanese beer giant Asahi bought its second Australian boutique brewer in as many years, taking over the well-established Melbourne-based craft brewer Mountain Goat, founded in 1997.

The acquisition comes after Asahi bought the Cricketers Arms brand in 2013, which has increased in sales by nearly 400 percent over the past year and is now the fifth largest craft beer brand.

Founded by Cam Hines and David Bonighton, Mountain Goat has been contract partners with Asahi for three years. In their statement the pair said that they are confident that with Asahi on board, they will be able to convert many more people to craft beer than we could do on our own. The founders stressed that Mountain Goat will continue to operate as a stand-alone business. Read on

 

USA – Craft brewer Dogfish Head partners with private equity firm LNK

Dogfish Head, the popular Delaware craft brewer with a cult following, has succumbed to the lure of Wall Street money by giving the New York private equity firm LNK a 15 percent stake in the company. On 28 September 2015, Dogfish’s founder Sam Calagione, 46, who only a few days previously had been feted by Vanity Fair magazine as one of the U.S. “celebrity brewers”, shared the news with his employees.

Whatever Mr Calagione’s reasons were for taking private investors on board, the move certainly implies that private equity is seeing craft brewers as a safe financial bet. Given the recent valuation of craft brewers at USD 1000 per barrel (or more), the stake could be valued around USD 40 million.

Dogfish ranked 13th largest craft brewer in the U.S. in 2014, according to the Brewers Association. Having recently completed a USD 52 million expansion of its brewing facilities, Dogfish is on track to brew 253,000 barrels beer (300,000 hl) this year, U.S. media say. Dogfish’s CEO Nick Benz was quoted as saying that carefully planned “low double-digit growth” will bring the company to its eventual goal of 600,000 barrels beer. Read on

 

Germany – As seen on social media: people drinking beer out of footwear

Man, some people are really stupid. They drink beer from shoes and boots at the Munich Oktoberfest - should you need proof. How disgusting.

Alas, the new Oktoberfest ritual isn’t new, it’s only gone plebeian. The first to indulge in it were some decadent Russian noblemen at the end of the nineteenth century, who drank champagne out of ballerinas’ slippers in tribute to their talent at the end of a show.

The fashion then moved to Paris’ brothels in the early twentieth century, where johns thus paid homage to the ladies of the night.

This most decadent of champagne rituals was only reawakened in 2009 by the House of Piper-Heidsieck, when it partnered with master shoe maker Christian Louboutin to create a fetish for the well-heeled. It consisted of a six-inch crystal stiletto champagne flute, sporting Mr Louboutin's iconic red soles of seduction. The flute came with a bottle of Piper-Heidsieck Brut and sold at the sublime price of EUR 350.

Sadly, the great unwashed at the Oktoberfest made do with smelly boots, pouring EUR 10.20 worth of beer (1 litre) into them. Beer may be a democratic leveller, but did we really need this sort of proof?

At the 2015 Oktoberfest, which ended on 4 October 2015, visitors cosumed 7.3 million litres of beer, down from 7.7 million litres in 2014. Visitor numbers dropped too: 5.9 million people compared with 6.3 million last year.

 

China – All eyes on China and CR Snow after the creation of MegaBrew

Most analysts seem to believe that once AB-InBev takes over SABMiller, it will have to sell SABMiller’s 49 percent stake in Chinese brewer CR Snow to appease China’s regulators. Combined, AB-InBev and CR Snow would hold a 38 percent market share. SABMiller, through CR Snow, holds a 23 percent share, while AB-InBev has a 15 percent share.

It will be remembered that following InBev's acquisition of Anheuser-Busch in 2008, the newly formed company fell foul of China's new anti-monopoly law. The regulator said the new drinks behemoth would be unable to increase its pre-existing stakes in Tsingtao Brewery and Zhujiang Beer, forcing AB-InBev to sell off its 27 percent stake in brewer Tsingtao.

This time round, however, some market observers argue that retaining Snow in China would be key for the new group’s future growth story because in China SABMiller has demonstrated so well its expertise in new market development.

While the world has been waiting for AB-InBev to make a formal bid for SABMiller, media have been wondering whether SABMiller’s greatest achievement to date – the growth of its business in China – is really worth the hefty premium which AB-InBev will have to pay for the job lot.

As the Wall Street Journal pointed out recently, China’s beer market slowdown is worsening a persistent problem for SABMiller. Despite the massive amount of beer consumed there, turning a decent profit is not easy.

“China accounts for a quarter of the world’s beer volumes and a tenth of the revenue but makes up just 3 percent of the global profit pool, according to Deutsche Bank. SABMiller, whose co-owned Chinese brand Snow is the world’s largest-selling beer (106 million hl in 2014), gets just 2 percent of its operating profit from China, even though the region makes up fully 20 percent of its global beer volumes,” the newspaper says.

In China, the top five brewers - CR Snow, Tsingtao, AB-InBev, Beijing Yanjing and Carlsberg – together control 70 percent of the beer market, with EBIT margins ranging between 6 percent and 9 percent.

Now, after decades of robust growth, beer volumes in China are in decline and turning a profit will get even tougher.

Beer consumption, which had grown at more than 6 percent a year on average over the past decade, dropped for the first time in 2014. Beer executives blame the decline on a range of temporary factors like the economic slowdown and bad weather.

But analysts worry, says the Wall Street Journal that the slump could be longer-term as China’s population ages and per capita beer consumption declines.

Last year, consumption of Snow was roughly flat at 106.6 million hl, down sharply from the 9.8 percent rise logged in 2013, according to data firm Plato Logic. SABMiller in July said its volumes in China dropped 3 percent for the quarter ended 30 June 2015.

SABMiller has been struggling to squeeze more profit out of China for years. Back in 2006, the company promised that China would “become a meaningful contributor” to its profit in the next five years. Nine years on, the promise is, well, still a promise. SABMiller is forecast to earn around USD 300 million in EBITDA from China this financial year, which must be considered small fry in view of the fact that profits from its Australian unit (7 million hl beer) are estimated to be almost three times as big.

In recent years, SABMiller has been trying to sell more premium beers in China, embarking on a strategy long employed by AB-InBev, whose more premium portfolio of beers—including Budweiser—has allowed it to raise profits. In 2011, AB-InBev launched Stella Artois in China and last August took Corona back in-house, ending a distribution deal with Carlsberg.

CR Snow has attempted to sell more premium variants under its Snow umbrella brand over the past few years, raising average selling prices to improve margins. The company’s Snow Opera Lady and Opera Gent beers retail for 25 yuan (USD 3.93) a bottle, compared with 3 to 5 yuan (USD 0.79) for a bottle of the mainstream Snow brand, The Wall Street journal points out.

Whether this strategy is really the answer to everything is open to debate. Analysts have criticised the focus on Snow variants, saying SABMiller should introduce more of its international brands in China. SABMiller’s U.S. brand Miller Genuine Draft, reintroduced in China in 2012 after a luckless launch in 2006, sells in only one Chinese province, observers say. Ari Mervis, SABMiller’s Asia-Pacific head, announced SABMiller would start selling Peroni, Grolsch and Pilsner Urquell – but only online - to test consumers’ appetite for the brands.

The reason why SABMiller has been held back from launching its international brands in China may have something to do with its partner China Resources Enterprise, in which the state-owned China Resources Holdings own an indirect stake of about 52 percent. Investec analyst Anthony Geard was quoted as saying that SABMiller’s hands might be tied. “CR Snow is ultimately controlled by government thinking,” he said. “Perhaps the Chinese partner, which has ultimate control, has a much more nationalistic approach and wants to establish a suite of Chinese and home-grown lagers.”

In terms of volume sales, the Chinese’s approach may make more sense: launching a premiumised version of a local brand could be more economically appealing.

The jury is still out if AB-InBev will be comfortable letting go of the low-margin Snow brand. One thing is certain, though: If AB-InBev were to lose CR Snow's facilities it would mean they will miss out on the valuable distribution network through which to market its premium Budweiser beer to more towns and villages across China.

CR Snow owned around 100 breweries in China with a total annual production capacity of 155 million hl beer last year, according to Deutsche Bank.

Consequently, if SABMiller’s Chinese partner CRE decides not to buy-out SABMiller's stake, and China's antitrust watchdogs force a sale, then bankers expect huge interest from Chinese and foreign brewers. SABMiller’s stake in CR Snow has been valued at around USD 4 billion and bankers say any sale could lead to a full-blown auction.

Whichever way the Chinese beer market will head in the medium term, things could get really interesting.

 

USA – AB-InBev buys Los Angeles’ largest craft brewer Golden Road

And we thought that “flipping it” – selling a house on quickly and make a profit – was a strategy confined to real estate. But no. Brewers are doing it too. Merely weeks after MillerCoors bought the two-year-old craft brewer Saint Archer, AB-InBev on 23 September 2015 snapped up a Californian up-start brewery too, acquiring Golden Road, which is Los Angeles’ largest craft brewer.

Financial terms of the deal were not disclosed, but as The Wall Street Journal says, recent brewery acquisitions have priced craft brewers at more than USD 1,000 a barrel.

Founded only four years ago, Golden Road expects to sell 45,000 barrels (53,000 hl) beer this year and is on track to open a second brewery and pub in Anaheim next year.

In the Los Angeles area, with a population of about ten million people, the number of craft breweries and brewpubs has swelled in recent years, from just a handful in 2010 to well over 30 today, with half a dozen more expected to open in the next six months.

When accusations were flying that she was doing a “flip” – after all, it has since transpired that it was Golden Road which called AB-InBev first – a defiant Meg Gill, President and co-founder of Golden Road, retorted: “This wasn’t a sellout move for me.” Ms Gill said she hadn't planned to sell to a Big Brewer but “as soon as we saw that vision, both companies were excited to be a part of what the other was doing.” Read on

 

Australia – Knock-on effects from AB-InBev-SABMiller disastrous for Lion

Carlton & United Breweries (CUB) may reclaim its title as Australia’s biggest brewer in the event of a successful takeover of SABMiller by AB-InBev. The UK’s ‘put-up-or-shut-up’ takeover rules require AB-InBev to make a formal offer for SABMiller by 14 October 2015. But as argued often before, the transaction would still face many hurdles, taking one or two years to complete.

In that event the knock-on effects may be significant for Australia’s two biggest brewers. Most likely, Lion, currently Australia’s number one brewer with a market share of 40 percent according to data company Euromonitor, will have to give AB-InBev’s brands, including Corona, Stella Artois and Beck’s back to SABMiller-owned CUB.

In terms of volumes, the impact of switching brands from Lion to CUB might look rather small. However, these brands represent 45 percent of the highly profitable imported premium beer market. This segment grew 14 percent in value terms in 2014, and is expected to grow at a compound annual growth rate (CAGR) of 4 percent in value terms over the next five years, predicts Euromonitor. Read on

 

United Kingdom – Payout bonanza for SABMiller managers after AB-InBev deal

For the potential ignominy of losing the battle against AB-InBev, SABMiller’s managers will be royally rewarded. According to The Guardian newspaper, around 1,700 top managers at brewer SABMiller could be in line for payouts averaging USD 1 million (GBP 650,000) each, if AB-InBev succeeds in taking SABMiller over.

Analysts at stockbroking firm Bernstein have calculated that share schemes could be worth in excess of USD 1.8 billion in total, based on calculations that AB-InBev pays around GBP 39 a share for its smaller rival. However, many analysts believe that AB-InBev will have to pay at least GBP 40 per share if not more, which would make the payout to staff rise much higher.

SABMiller’s CEO Alan Clark would receive significantly more than the average. His options could be worth at least GBP 40 million (USD 61 million), according to The Guardian. Read on

 

USA – Management shakeup at craft brewer Stone

Does Greg Koch, the co-founder and CEO of California’s craft brewer Stone, really only want to take Tuesday afternoons off? On 11 September 2015 Mr Koch, 51, announced he will become Chairman of Stone, while rejecting all speculation that a sale was in the offing.

Mr Koch told U.S. media that he will assume the duties of Executive Chairman, focusing on long-term strategic planning for the company, handing day-to-day management over to a successor. The company has begun the search for a new CEO, but says there is no set time frame to find a candidate.

Mr Koch co-founded the brewery in 1996 with Steve Wagner. It is the ninth-largest craft brewer in the country, with over 1,100 employees, an estimated annual output of over 340,000 hl beer (2014) and revenues in excess of USD 137 million (2013). Last year, it expanded its production operations beyond the U.S., announcing plans to open a USD 25 million facility in Berlin, Germany.

Mr Koch will continue to oversee development of that facility as well as a recently announced brewery expansion into Richmond, Virginia. Read on

 

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