AB InBev And SABMiller Merger Focuses On Markets Outside The U.S.

After going back and forth for almost two months, the Anheuser-Busch InBev (NYSE:BUD) and SABMiller merger has finally taken a tangible form. As expected, the combination is more about exploiting the potential in Asian and African beer markets, and further strengthening Latin American operations. The sale of SABMiller’s interest in its joint venture in the U.S., the home market for Anheuser, reflects how the merger is not really bringing anything new to AB InBev’s business in Anheuser’s home market. Is this merger a trade-off between extracting potential in new markets and losing potential sales in the U.S.?

SABMiller is selling its 50% voting interest and 58% economic interest in MillerCoors to Molson Coors, its partner in the joint venture, for around $12 billion. The deal gives Molson Coors the global rights to the Miller brand, and also the right to continue selling brands it currently holds in its portfolio in the U.S. (MillerCoors), including Peroni and Pilsner Urquell. Now, the Miller brand is one of the highest-selling beer franchises in the world, with a strong brand recognition, and has also registered strong growth around the world. For example,  the Miller franchise sold around one million hectoliters across the Latin American region with 25% growth year-over-year in the fiscal year 2015 (ended March). Losing out a global brand which holds significant importance to the SABMiller company could be a potential bad move. However, this was expected as the combination between AB InBev and SABMiller would have been met with serious antitrust issues.

We have a $120 price estimate for Anheuser-Busch InBev, which is roughly in line with the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

AB InBev has a solid 46% market share in the U.S., followed by MillerCoors with a 25% share. The AB InBev-SABMiller merger would result in almost monopolistic conditions in the U.S. beer market had SABMiller severed ties with Molson Coors and merged its operations with AB InBev in the country. In 2013, due to anti-trust issues following the Grupo Modelo acquisition, Anheuser had to give up the likes of Corona and Modelo, which are fast growing imported beer brands, to Constellation Brands in the U.S.  In fact, Corona Extra, Modelo Especial, and Corona Light form three of the top four highest-selling imported beer brands in the country. The imported beer category altogether is growing at a swift pace and constitutes 15% of the U.S. beer market. Anheuser cannot benefit from the gains in Corona and Modelo, and neither the gains in profitability due to the higher price points of the imported beer brands. Is giving away SABMiller’s interest in Molson Coors a bad move?

Maybe not as bad as the Grupo Modelo divestiture seems.

Domestic beers are already declining in the U.S. This is the largest category, forming close to 74% of the overall beer market, but as customers move towards imported and craft beers, volumes in this segment have been consistently declining. Miller Lite is the third highest selling domestic beer in the country, with sales lesser than that of Bud Light and Coors Light, but more than that of Budweiser, which is the second-highest selling Anheuser brand in the U.S., forming approximately 17% of the net U.S. beer volumes for AB InBev. But as volumes have been declining for the domestic beer brands, maybe giving away Miller isn’t so bad.

On the flip side, SABMiller, and now AB InBev, lose the potential growth for the Miller imported brands in the MillerCoors portfolio. In addition, this strengthens Molson Coors’ position as the number two in the U.S. beer market behind AB InBev. According to Molson Coors, it expects to realize cost savings of at least $200 million a year by the fourth year after the transaction, if the merger goes through. The new AB InBev-SABMiller also loses out on Miller’s potential growth in markets such as Latin America, Asia, and Africa. This could hurt the new company going forward.

The third largest takeover in history is now subject to regulatory and shareholder approval, following which, the world will see the creation of the first truly global beer company — as AB InBev proclaims. The combined revenues for the company will be around $64 billion, and EBITDA will stand at $24 billion, but this doesn’t consider divestitures or other restructurings that may be required in relation to the combination. Nonetheless, the new massive brewer will control a significant portion of global beer volumes even after the divestitures — around 29%, as estimated by Euromonitor. ^[1] The U.S. business for AB InBev will not be affected much by this transaction, and time will tell whether divesting SABMiller’s MillerCoors interests becomes another ‘Corona,’ or is a small price to pay for the larger growth and synergies that SABMiller now brings in Asia, Africa, and Latin America.

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1. AB InBev completes agreement for SABMiller [↩]