Dominance in U.S. market makes A-B a take-over target | St. Louis Public Radio

Dominance in U.S. market makes A-B a take-over target

Jun 9, 2008

This article first appeared in the St. Louis Beacon: June 9, 2008 - (Originally posted June 6, updated June 11.) 

Why has Anheuser-Busch gone from the largest brewer in the United States to the largest brewery takeover-target in the world?

A bid from the Belgian beer giant InBev confirms ironically that what made Anheuser-Busch the U.S. King of Beers also has made it vulnerable to foreign control.

Over the years, Anheuser-Busch used marketing muscle to grab half the U.S. market; but it was so focused domestically that it let competitors grab huge chunks of fast-growing foreign markets.

"It was the dominant company in the 1980s and 1990s, but it lost some of its competitive edge," says Benj  Steinman, editor of Beer Marketer's Insights, a Nanuet, N.Y.-based publisher of beer-industry research and newsletters.

Anheuser-Busch is now third in global beer sales behind InBev and SABMiller, Steinman says. SABMiller is the South African-based company that owns Miller Brewing Co.

"Anheuser-Busch has made some strategic errors because they haven't expanded globally like they should have," says G. D'Anne Hancock, associate professor of finance at the University of Missouri-St. Louis College of Business Administration. "If they don't grow globally, then they don't grow."

When the U.S. beer market was experiencing healthy growth, Anheuser-Busch's strong marketing and promotion tactics -- plus its powerful distribution system -- helped it overwhelm the competition. However, as the U.S. market growth slows, yesterday's aggressive marketing has become today's excessive spending -- and tomorrow's target for cost-cutting.

"A-B rolls out the barrel when it comes to marketing," says Juli Niemann, executive vice president at the Clayton financial advisory firm Smith, Moore & Co. "A-B was never known for tight cost controls. They pay generous salaries and have higher marketing expenses."

To unsentimental Wall Street analysts, Anheuser-Busch's expenses makes the St. Louis company a tempting target for the vigorous cost-cutters at InBev. More importantly, Wall Street says Anheuser-Busch's strength in the U.S. attracts InBev, whose U.S. presence is minor.

Add a few more ingredients -- such as Anheuser-Busch's stagnant stock price and the weak U.S. dollar in contrast to  the euro -- and you have a formula for a possible takeover.

"If they watched their costs, the stock wouldn't be where it is today," says Niemann.


Anheuser-Busch's recent stock performance has been a blow to long-term shareholders who, for many years, viewed the company as a license to print money.

If you bought the stock 25 years ago, your investment is up by 37-fold after adjusting for stock splits and dividend payments. By contrast, the S&P 500-stock index has grown by 8-fold.

But the stock, whose symbol is BUD, hasn't thrilled recent shareholders. For the five years ended June 6, an investment in Anheuser-Busch grew by 22 percent when dividends are included. If you strip out the dividends, the gain is 9 percent. If you remove the recent jolt to the stock caused by the InBev rumor, there's been no gain.

During this five-year period, the S&P-500 index gained 38 percent. The value of Molson Coors Brewing Co. more than doubled when adjusted for stock splits and dividends. (Shares of InBev and SABMiller don't trade on U.S. exchanges.)

Even with a rumored takeover, most analysts are neutral on Anheuser-Busch. According to data compiled by the Thomson Reuters financial data firm, there are four buy recommendations, 10 hold ratings and one suggestion to sell the stock.

The alleged takeover threat, reported in late May by a Financial Times blog, remains a rumor at a $65 a share for a deal worth about $46 billion. If InBev backs off, or if Anheuser-Busch fends off InBev via assorted financial strategies, the underlying A-B theme remains the same.

"There's a lot of pressure domestically, and they're getting wiped out globally," says UMSL's Hancock. "They've had no avenue for growth."

The domestic-market pressure accelerated last week when the Justice Department approved the merging of the U.S. operations of SABMiller and Molson Coors Brewing Co. Last year, these companies, respectively, accounted for 18.4 percent and 11.1 percent of the U.S. market, says Beer Marketer's Insights. Anheuser-Busch had 48.2 percent.

Given its U.S. market share, analysts doubt that Anheuser-Busch could expand its U.S. presence via acquisition or merger due to antitrust considerations.

"From what I've been able to gather, they are aware of their mistakes," says Hancock. If there's no takeover by InBev, she predicts Anheuser-Busch "will try to make more inroads in international markets; but it may be a case of too little, too late."


Aside from the United States, Anheuser-Busch's biggest markets are Mexico and China. Anheuser-Busch owns about half of Mexico's Grupo Modelo, whose products had a 55 percent market share in Mexico in 2006, says a recent Merrill Lynch report.

However, the St. Louis company doesn't have voting or operating control of Grupo Modelo. Investments in several Chinese breweries have created an 18.5 percent market share as of 2006, says Merrill Lynch. The company cites Canada, Ireland and the United Kingdom as its other "primary foreign markets."

Between 2001 and 2007, Anheuser-Busch bought an additional stake in one Chinese brewer (it owns 27 percent), acquired another Chinese brewer, and increased its ownership in a third brewer to 97 percent from 92 percent.

"There were many things that were probably available to them. but they didn't participate fully," says Steinman of Beer Marketer's Insights.

Meanwhile, InBev and its predecessor company, Interbrew, have been much more active in foreign markets. Between 2001 and 2007, the Merrill Lynch report says they made 10 deals, including the 2004 merger of Interbrew and Brazil's AmBev to create InBev. They have bought full or partial control of companies in Germany, Canada, Spain, China and Russia.

Most deals have been relatively small, but the biggest deal, worth about $1.6 billion, was the 2001 acquisition of Germany's Beck & Co. By Merrill Lynch's calculations using 2006 data, InBev had 30 percent or more market share in nine countries and between 10 percent and 29 percent in another nine. Its China market share was 8.6 percent.

Merrill Lynch identifies InBev's biggest markets as Brazil (34 percent of total InBev sales volume), China (11 percent), Russia (7 percent), Argentina (6 percent) and the United Kingdom (5 percent).

South Africa's SAB has been a busy buyer, too, with six acquisitions including Miller Brewing Co. in 2002 and a large Colombian beer-maker in 2005. Other full or partial purchases were made in Honduras, Italy, Poland and the Netherlands.


If the domestic market isn't growing and A-B hasn't fully exploited foreign markets, the only other prospect for growth is diversification -- a strategy that has yielded mixed results since the 1980s.

Does anyone remember the Campbell-Taggart bakery-goods company? How about Eagle Snacks? Or Zeltzer Seltzer? Or Dewey Stevens wine coolers? They and a host of other attempts at diversification are long gone via spin-off, sale or cancellation.

Even the St. Louis Cardinals, bought in 1953 by August A. Busch Jr., were sold after the 1995 season along with Busch Stadium by August A. Busch III.

"They had a romance with diversification, but they soured on it," says Stuart I. Greenbaum, former dean of the Olin Business School at Washington University.

In an effort to enter the market for non-alcoholic beverages, "why didn't they get into bottled water like Coke and Pepsi did?" asks Greenbaum, who also is an emeritus professor of managerial leadership at Olin. And he wonders why A-B didn't make a move many years ago on mid-sized soft-drink companies like 7-Up.

The company still sells several non-alcoholic beers, such as O'Douls, and it has been selling a line of caffeinated, so-called energy drinks since 2001.

Some diversification has worked. The theme-parks subsidiary has produced steady sales, but this "is not an area that allows for the kind of growth that A-B needs," says UMSL's Hancock.

If InBev buys Anheuser-Busch, Hancock and Greenbaum predict this unit would be sold to help pay for the deal. The packaging division -- which includes the making of can and lids, recycling aluminum and plastic containers and printing labels -- could also be targeted for a sale following a takeover.

Anything unrelated to beer-making still plays a small role at Anheuser-Busch. Last year, the entertainment subsidiary contributed 8 percent of net sales and 6 percent of net profit. The packaging unit contributed 10 percent of sales and 4 percent of net profit.

International beer represented 7 percent of sales and 26 percent of net profit, due primarily to the way Anheuser-Busch is paid through its Grupo Modelo investment. Domestic beer accounts for three-fourths of sales and nearly two-thirds of net income, producing both a blessing and a curse in current market conditions.