How The Potential AB InBev-SABMiller Deal Focuses On Africa

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Much hullabaloo surrounds the potential Anheuser-Busch InBev (NYSE:BUD) and SABMiller merger, ostensibly as the coming together of the world’s top two brewers would create conditions of monopolistic competition, hurting small businesses and also customers who’d have fewer options to choose from. The third largest acquisition in history beckons regulatory approval, after the mammoth $108 billion deal was agreed to in principle by both boards. However, this merger, which once seemed unlikely because of the plethora of antitrust concerns, could receive less resistance than previously expected. This is because the AB InBev-SABMiller merger seems more about the emerging markets, especially Africa.

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Granted that SABMiller has a solid foothold in mature beer markets in North America and Europe, and the combination with AB InBev posed threats to smaller companies, especially craft breweries, due to increased pricing power, stronger distribution channels, and even the stronger market presence of the proposed beer giant. However, by the looks of it, this merger doesn’t have much to do with the developed markets. AB InBev already has an established business in North America — with an over 45% market share in the U.S., and over 40% share in Canada.  This region alone contributed nearly 37% of the net normalized EBITDA for the brewer in 2014. [1] On the other hand, Europe formed 7.2% of the net normalized EBITDA last year. AB InBev already has a strong presence in developed markets, which formed 47% of the net revenues last year, and these markets offer relatively lower growth, due to already high beer penetration levels and growing health and wellness concerns.

So, the collaboration with SABMiller won’t be to augment business in developed markets, one would imagine. This has been made clear by the announcement that SABMiller is selling its 50% voting interest and 58% economic interest in MillerCoors in the U.S. 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 country (MillerCoors), including Peroni and Pilsner Urquell. This pro-active measure to appease U.S. anti-trust authorities was followed by news that the Belgium-based brewer is now exploring the sale of a number of SABMiller’s European premium brands and related businesses, including the Peroni and Grolsch brands — two of the four global brands in SABMiller’s portfolio. [2]

 

The sale of global rights to the Miller brand, and now the Peroni and Grolsch brands, highlight how AB InBev is looking to proactively address potential regulatory concerns. This will be part of the price to pay as the Belgian brewer attempts to assure a hassle-free combination with SABMiller. In China, too, SABMiller has a joint venture called CR Snow, with China Resources Enterprise, which has a leading 23% volume share in the country’s beer market. Antitrust issues might call for Anheuser to sell off SABMiller’s partnership deals in the country. In addition, while SABMiller is a key Coca-Cola bottler in Africa, AB InBev bottles PepsiCo beverages in Latin America — another potential conflict of interest.

What is becoming more and more clear is how this deal is most about AB InBev’s conquest of Africa and other emerging markets. As of now, the brewer has no meaningful presence in Africa, while SABMiller has a leading 34% market share in the continent. [3] Around 33% and 30% of SABMiller’s net revenues and EBITDA, respectively, came from Africa in its fiscal 2015 (ended March). Another 12% of the revenues and EBITDA came from the APAC region, where AB InBev has relatively lower presence mainly in the form of its China business and Oriental Brewery in South Korea. Less than 6% of AB InBev’s normalized EBITDA in 2014 came from the Asia-Pacific region. Thus, the combination with SABMiller makes sense as AB InBev looks to become a well-diversified global beer business.

 

The high growth potential in Africa doesn’t hurt AB InBev’s cause either. According to the company, beer volumes in Africa are expected to grow by 44% from 2014 to 2025, nearly three times the forecast global rate. [4] Africa, as a percentage of net global beer volumes, is estimated to reach over 8% by 2025, up from 4.4% in 2000. These compelling estimates back up why AB InBev would be interested in penetrating the continent. Why acquiring a beer business that is already well established in Africa makes sense is because of the relative difficulty to set up in the continent. The beer market in Africa is still relatively nascent, and as disposable incomes increase, and the beer-drinking culture spreads, beer volume sales are expected to rise. With strong distribution channels, and strong brand image, SABMiller brings forth an opportunity for AB InBev to increase the reach and availability of its globally renowned brands, such as Budweiser and Corona.

 

And then there are the synergy benefits. AB InBev estimates incremental recurring run-rate pre-tax cost synergies of at least $1.4 billion per year, four years following the completion of the combination, buoyed by the reduction in overhead expenses, best practice sharing, combined sourcing of raw materials and packaging materials, and brewery and distribution efficiencies.

In the event that Anheuser-Busch InBev fails to receive regulatory approval, it will have to pay a $3 billion fee to SABMiller. AB InBev has taken preemptive steps to address potential regulatory concerns, and more news relating to the same might surface soon, especially in China and Latin America. What is becoming clear is that the brewer will benefit from the SABMiller combination the most in the form of emerging market potential, given that beer growth in developed markets remains next to nothing.

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Notes:
  1. AB InBev 2014 annual report []
  2. AB InBev press release []
  3. AB InBev Takeover of SABMiller Would Realign Global Beer Industry, wsj.com []
  4. AB InBev-SABMiller investor presentation []