This article first appeared in the St. Louis Beacon: August 22, 2008 - The deal hasn't been signed yet, but already beer industry experts are predicting that InBev's takeover of Anheuser-Busch will provoke more mergers and acquisitions in a rapidly consolidating industry.
"The targets are obvious," says Benj Steinman, editor of Beer Marketer's Insights, of Nyack, N.Y., which conducts research and publishes reports about the industry. "It's a question of whether they can do it."
In this case, "they" are other international brewers, which will feel the need to grow because InBev plus Anheuser-Busch creates the world's largest brewer by a wide margin.
SABMiller, formed by the 2002 acquisition of Miller Brewing by South African Breweries, is slightly larger than InBev based on 2007 beer volume, Steinman says. Anheuser-Busch is third and the Netherlands' Heineken is fourth. These companies produce about half the world's beer.
After InBev's takeover, which is expected by year end, the new company will be 75 percent larger by volume than SABMiller and triple the size of Heineken, based on 2007 data.
However, Heineken's volume has increased this year -- thanks to the April acquisition of some products of Scottish & Newcastle, which had been the United Kingdom's largest brewer. Denmark's Carlsberg acquired the other products through a joint venture purchase with Heineken of the British company.
Mergers will continue not only because giant brewers have insatiable appetites but also because economic issues -- from higher crop prices to higher fuel costs -- will make smaller brewers vulnerable, says Harry Schuhmacher, editor and publisher of BeerNet Communications, in San Antonio, Texas, which produces two newsletters for beer-industry executives. "Economies of scale are everything."
Merger almost didn't happen
InBev's takeover of Anheuser-Busch almost was derailed because the St. Louis company was trying to buy out its Mexican partner Grupo Modelo.
It's hard to determine exactly how close, but a recent Anheuser-Busch filing with the Securities and Exchange Commission and other sources indicate there was a strong chance Anheuser-Busch would have bought Grupo Modelo if InBev hadn't raised its takeover offer to $70 a share from $65.
Grupo Modelo's board of directors "actually agreed to deal with Anheuser-Busch for a combination of stock and cash" worth $14 billion, says a recent issue of Beer Marketer's Insight, citing unnamed sources.
The company previously had insisted on remaining "proudly Mexican," the newsletter says. "Imagine Modelo's shock" when Anheuser-Busch's board went with the $70 a share offer from InBev.
Anheuser-Busch doesn't confirm that a deal with Modelo was ready to go. However, a merger proxy filed on Aug. 15 with the SEC said intense negotiations took place separately with InBev and an unnamed "third party."
The discussions ran from June 12, the day after InBev made its first offer, through July 13, when the St. Louis brewer accepted its enhanced offer.
Anheuser-Busch owns 50.2 percent of Grupo Modelo, but lacks operational control. Analysts had speculated that Anheuser-Busch might try to acquire the rest of the Mexico's largest brewer to repel InBev. They said buying Grupo Modelo might make Anheuser-Busch too expensive for InBev.
The SEC document said Anheuser-Busch "conducted discussions with the third party regarding a potential strategic transaction." The third party was clearly Grupo Modelo.
A week after the companies started talking, Carlos Fernandez, chairman and CEO of Grupo Modelo, resigned as a director of Anheuser-Busch. His departure "did not impact the board's consideration of strategic alternatives, including its consideration of InBev's proposal and a possible strategic transaction with the third party," the SEC document says.
On June 26, Anheuser-Busch rejected InBev's first offer, and by July 1, Anheuser-Busch's board members were in detailed discussions with investment advisers and lawyers about dealing with the third party.
On July 7, as these talks dragged on, Anheuser-Busch's board "recognized that the passage of time could jeopardize the negotiations" relating to a deal with the third party, the SEC document says.
The board authorized CEO August A. Busch IV and two independent directors to tell InBev that they were "close to making a decision" about "other strategic alternatives." On July 8, they told InBev to make its best offer, and the next day the Belgian brewer served up $70 a share in cash.
Anheuser-Busch's board contemplated a counteroffer, but the directors decided "doing so at that time could jeopardize the potential basis on which to move forward on discussions with InBev," the SEC document says. "The board noted that any potential negotiated transaction would need to have a high degree of certainty of closing."
On July 10, the companies signed a confidentiality agreement, and they sealed the deal on July 13.
Schuhmacher predicts that when brewers run out of beer worlds to conquer -- and even before they snap up every competitor -- they will expand their empires into soft drinks and wine and spirits. SABMiller is one of the world's largest bottlers of Coca-Cola, and several Latin American brewers are prominent soft-drink bottlers. Wine and spirits giants, such as Diageo and Constellation Brands, do so some beer marketing.
Today's most tempting beer targets hold large market shares in their respective countries, and many are still owned by families.
"Because there are a lot of family beer businesses, that means there's a lot of fat on the bone," says Schuhmacher, making them targets of cost-cutters like InBev and SABMiller.
Complex family ownership, nationalism and antitrust issues are the key impediments to mergers and acquisitions. If antitrust problems are resolved, experience shows that the other matters often can be addressed with a big check.
Jingoistic appeals to keeping Budweiser under American ownership melted when InBev raised its offer to $70 a share from $65. Even the initial offer was a better deal for Anheuser-Busch shareholders because the company's stock sat in the $40s to low $50s for five years. Anheuser-Busch family members, only two of whom are directors and/or managers, owned only about 4 percent of the stock.
Analysts doubt this deal will provoke U.S. antitrust concerns. Although Anheuser-Busch controls just over 48 percent of the U.S. market, InBev's U.S. market share can be counted on one hand with a few fingers left over. InBev's U.S. exposure is primarily through a deal in which Anheuser-Busch markets InBev brands Stella Artois and Beck's.
Also, there doesn't appear to be major antitrust issues among regulators in foreign markets. However, foreign markets are where the action will be for the next round of deals.
MEXICO MERGER MANIA?
Mexico offers intriguing targets because its beer industry is a duopoly: Grupo Modelo controls about 56 percent of the market and Fomento Economico Mexicano, or FEMSA, has the rest.
Analysts like duopolies because dueling companies have little incentive to launch profit-eroding price wars. To analysts, that means a greater predictability of revenue.
"FEMSA has long been considered the prettiest belle of the ball," says Steinman, who like other industry experts, predicts SABMiller and Heineken are the most logical suitors.
The question is whether a suitor can penetrate the complex ownership. "FEMSA is controlled by a voting trust, composed mainly of five wealthy Mexican families," says a recent report by analyst Mitchell Corwin of the financial research firm Morningstar. Family members occupy board and top management jobs.
FEMSA is attractive because it is more than beer. It has a majority stake in Coke FEMSA, the leading soft-drink bottler in Latin America and the second largest Coca-Cola bottler in the world, Corwin says.
"It generates profit margins that are the envy of the bottling world, and consumption growth in its markets should be robust for years to come," he adds.
In addition to its strong second place in Mexico's beer market, FEMSA has improved its U.S. import business, thanks to a distribution deal with Heineken. FEMSA is best known in the United States for Dos Equis and Tecate,
FEMSA also owns Oxxo, "the most dominant and fastest-growing convenience store chain" in Mexico, Corwin says. Oxxo distributes FEMSA's beverages. Many analysts suggest FEMSA could use its Coca-Cola connection to expand its beer marketing in Latin America.
FEMSA, which trades on the New York Stock Exchange, enjoys strong support on Wall Street. Six analysts have buy ratings and two are neutral, according to Thomson Reuters. The stock is up 35 percent for the past 12 months, and it has more than tripled over the past five years.
THE CATALYST
Although FEMSA has vowed to remain independent, some analysts say it will feel pressure depending on Grupo Modelo's next move.
Anheuser-Busch owns 50.2 percent of Grupo Modelo and has nine representatives on its 19-member board, but the St. Louis company has no operational control. As the U.S. market matures, Anheuser-Busch has relied more on its partner to push profit growth.
Grupo Modelo has a complex ownership structure, making the company seem enigmatic to analysts. The structure includes three classes of stock with several families controlling a majority of voting shares and a family member as chairman and CEO.
Analysts aren't sure how the InBev takeover bid affects Grupo Modelo's contract with Anheuser-Busch. In mid-July, Grupo Modelo said Mexican law gives it the right to decide who its new partner will be, suggesting that it could block the InBev takeover.
InBev responded by saying said it wanted a long-term relationship with Grupo Modelo, adding that it was having friendly discussions with the company. Neither company has said anything since then.
Analysts also aren't sure if Grupo Modelo wants to buy back its stake from Anheuser-Busch, allow the new company to simply assume Anheuser-Busch's role or try to extract more money from InBev. "The disconnect in the Modelo discourse is baffling," said the Credit Suisse investment banking firm in a mid-July analysis.
If Grupo Modelo choses independence, several international beverage giants would probably make bids. When Grupo Modelo makes up its mind, it will produce "enormous ripple effects" in the U.S. and Mexico, Steinman says.
Another potential player in Mexico is American Beverage Co., the anglicized name of InBev's Brazilian component. The 2004 merger of the Brazilian company, nicknamed AmBev, and Belgium's Interbrew created InBev.
Although InBev's stock isn't traded on U.S. exchanges, American Beverage's stock trades on the New York Stock Exchange. InBev holds a controlling interest.
If the new Anheuser-Busch InBev decides to buy all of Grupo Modelo, the situation becomes complicated.
Does the new company acquire Grupo Modelo itself? Or does it exercise control over the Mexican company by selling a controlling stake in Grupo Modelo to AmBev? Although AmBev is the logical administrative choice, such a transaction would put pressure on its balance sheet.
"AmBev is one of the most profitable and efficiently run brewers in the world," says Ann Gilpin, of Morningstar, in a recent research report.
AmBev also is a prominent bottler and distributor of Pepsi-Cola products. "Brazil's beer market is the fourth largest in the world and its soft-drink market is the third largest, yet per capita rates are low," Gilpin adds. "We see significant growth opportunities."
Although AmBev's stock has fallen 22 percent since late February, AmBev still represents the best long-term stock investment among six major international brewers measured at intervals of three, five and seven years.
A CANADIAN CANDIDATE
InBev controls Canada's Labatt Breweries through AmBev, and the Canadian market offers another potential takeover opportunity because it's essentially a duopoly of the Labatt and Molson brands. The latter is marketed by Molson Coors Brewing Co., reflecting the 2005 merger of Molson and the U.S.' Coors Brewing Co.
Morningstar analyst Ann Gilpin says Molson Coors has about 41 percent of the Canadian market, which is "slightly more" than Labatt. With such market dominance, they are "rational" competitors that have avoided price wars, Gilpin says in a recent research report. "We think Molson Coors is becoming a much stronger firm."
Analysts say SABMiller would be the most likely buyer for Molson Coors. The two companies have a joint venture in the United States that places the Miller and Coors brands under one administration. In the U.S., the Miller and Coors brands have a 30 percent market share, basically creating a duopoly with Anheuser-Busch.
"Rising fuel costs created a huge impetus for the joint venture," says Schuhmacher of BeerNet Communications. "It's a logical progression that SABMiller will acquire them."
Molson Coors has a complex ownership system linked to respective families. Its stock trades on the Toronto and New York exchanges; it has two sets of stock; and it has two headquarters. Two members of both the Molson and Coors families sit on the 13-member board.
The families "have had trouble getting along internally over the years, so indefinite boardroom harmony seems very unlikely." says Gilpin.
Although Molson Coors recently issued second-quarter results that fell below Wall Street expectations, it still enjoys strong analyst support -- eight buy recommendations vs. two neutral ratings, according to Thomson Reuters. Adjusting for a stock split last year, the stock is up about 12 percent for the last 12 months and 44 percent over the last two years.
OTHER PROSPECTS
When Anheuser-Busch initially rebuffed InBev's initial advances, some analysts speculated that InBev might try to pair with SABMiller. Whether the comments reflected too much free time or a well-timed bluff by InBev, it illustrates that just about any company in any country could be up for grabs.
The most logical choice is China. SABMiller owns 49 percent of a joint venture called China Resources Snow Breweries. Anheuser-Busch owns two Chinese breweries and has a 27 percent stake in Tsingtao, which is second in volume to China Resources. Tsingtao's majority owner is the Chinese government.
If the new Anheuser-Busch InBev gained control of Tsingtao, its China business "would be nearly as large" as its U.S. operations, says Steinman of Beer Marketer's Insights. In any case, Anheuser-Busch InBev will be the market leader in China with just over a 20 percent market share and "slightly ahead" of SABMiller.
More deals in more markets "is the way of the world," he says.
Robert W. Steyer is a freelance journalist in New York.