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Posted May 2016

What’s next for AB-InBev?

Mergers & Acquisitions | It’s a funny world out there. Remember when InBev bought Anheuser-Busch in 2008? Almost all the world took note. Seven years on, AB-InBev’s proposed USD 100 billion plus takeover of SABMiller received little to no attention outside the business pages. Although it is the ultimate deal that reeks of size for size’s sake, AB-InBev’s eventual world domination in beer will merely be a welcome side-effect. According to analysts, AB-InBev’s real reason for buying SABMiller was laughably absurd. They could not get Coca-Cola at this point and took the opportunity to bulk up instead.

AB-InBev and Coke: it’s a perplexing thought, no? However, Ian Shackleton, a Nomura analyst, already said last year: “The numbers are enormous but feasible. You could create more value out of Coke than almost any other fast-moving consumer goods company.”

For proof that in the world of beer, the addition 1+1=3 can stand up to reason, look no further than to AB-InBev’s track record. In 1989 Jorge Paulo Lemann and two partners bought the 18 million hl Brazilian brewer Brahma for USD 50 million. A decade on Brahma clubbed together with its rival Antarctica to become AmBev. In 2004 a merger with Interbrew, the Belgian brewer of Stella Artois, created InBev. Four years later, InBev paid USD 52 billion for Anheuser-Busch. And if those deals weren’t vertiginous enough, in 2012 the re-named AB-InBev dished out USD 20 billion for full control of Mexico’s Grupo Modelo. Though clinching only a handful of deals in 25 years, the Brazilians spectacularly managed to hike total volume sales to over 450 million hl by 2015. In other words, from a mouse an elephant has grown.

As SABMiller’s late CEO Graham Mackay pointed out in 2011, the global consolidation of the beer industry was something of a curiosity. There were limited financial advantages in combining beer businesses which had no geographical overlap. Lacking obvious synergies, these horizontal transactions nevertheless did the trick: the buy-and-build circus made investors in the world’s number one and two brewers incredibly wealthy.

Those self-same investors probably could not care less that these deals awarded AB-InBev the unflattering title of a “roll-up” company. To the likes of me, a roll-up company is the business equivalent of a vacuum cleaner. Seemingly indiscriminately, it will suck up everything that lies in its path. The Economist newspaper in 2015 attested roll-ups a near-clinical addiction to doing takeovers and called AB-InBev “the greatest roll-up in history”, having “carried on buying beer brands faster than its customers neck pints.” Once the SABMiller deal goes through, expected to be completed in the second half of 2016, AB-InBev will have “wheeled and dealed its way to being the world’s 13th-most-valuable firm.”

Make no mistake, for roll-up companies making deals is not self-serving. “What counts is what comes out at the other end,” a German Chancellor once quipped. Same in business. Roll-ups aim at integrating what they buy and increasing the value of the enlarged firm. As Mr Mackay stressed, transactions need to create “more value” (a higher EBITDA) than any sum paid. Making 1+1=3 work is not just a sign of managerial excellence. A company’s value is of utmost importance in stock-for-stock mergers, when no cash changes hand, and in a sale. In this respect, Mr Mackay’s deft hand at creating “more value” through deals has served SABMiller very well: firstly, when SAB merged with U.S. brewer Miller and Colombia’s Bavaria and needed to negotiate how large a stake in SABMiller to award these two sellers; secondly when SABMiller sold itself and succeeded in commanding a high price (a multiple of 17 times EBITDA) from AB-InBev.

In the early days of globalisation, highfaluting strategy messages were used to justify major transactions. Curiously, nowadays, there are none forthcoming and, what’s more, no one seems to care. AB-InBev’s offer for SABMiller was termed – modestly, it appears – “Proposal to build the first truly global beer company”. Only a pedant would scratch their head. Hadn’t AB-InBev and SABMiller already billed themselves as “global brewers” before? So, what’s the difference between a “global brewer” and a “truly global brewer”, except for an emphatic adverb that most likely an officious PR person had edited in? Of course, AB-InBev would not brag about wanting to create a beer behemoth controlling about 30 percent of global beer volumes and over 50 percent of the beer profit pool. Shrewdly, AB-InBev’s CEO Brito left it to the media to figure it out.

Nonetheless, there were pertinent reasons why AB-InBev went after SABMiller when it did.

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