SABMiller deal is likely to see rivals consolidate

Carlos Brito, the CEO of Anheuser-Busch InBev. Picture: Julien Warnand, EPA

Carlos Brito, the CEO of Anheuser-Busch InBev. Picture: Julien Warnand, EPA

Published Nov 13, 2015

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At $106 billion (R1.5 trillion) the proposed takeover of SABMiller by Anheuser-Busch (AB) InBev is the third-largest acquisition, with almost one in every three beers worldwide poised to be made by the new mega brewer.

Now AB InBev has announced its plan to sell its 58 percent stake in MillerCoors to Molson Coors in Canada for about $12bn. This removes a major competition barrier to the acquisition of SABMiller.

In view of the size and scale of AB InBev post the SABMiller deal, there is likely to be consolidation among the remaining players. This is a trend in pharmaceuticals, where valuations are rising as the industry consolidates. Size is necessary to compete on cost and distribution. Keeping product availability through distribution requires big advertising budgets to compete with big brands. Molson Coors may not be independent for long.

A steep price to pay?

For shareholders $106bn is a steep price. Cost savings are estimated at $1.4bn. This is a figure well below expectations, suggesting that pricing and distribution benefits may be the real driver of the deal.

Normally competition authorities start to become interested when combined market shares exceed 25 percent. AB InBev’s consolidated beer market share in the US will be 70 percent and in China more than 40 percent. US and China businesses make up more than a third of the acquisition.

In many jurisdictions competition authorities are worried as much about keeping jobs as protecting consumer interest.

Forced sales through competition authority mean lost value to shareholders.

Competition authorities and lost value

The AB InBev board are attempting to sell the deal to authorities as a way to create more consumer choice. The suggestion is they will launch existing big brands into new countries. In practice this seems unlikely as AB InBev will not wish to spread its marketing spend among more brands than necessary. Rationalisation of ranges is more likely to create further savings.

Competition authorities can define the market as they feel appropriate for example “beer” or “non-craft beer” or “premium lagers”. A consequence is that AB InBev could be looking at problems and lost value opportunities globally. This might apply not only in the US and Canada, Latin America and China, but also parts of Europe where markets may be defined quite tightly by country and beer type. Sales of businesses and restrictions on job losses (almost certain in South Africa) will all result in lost opportunities to extract planned benefits.

Further concessions may also be required in the US. At what point does this become value destroying?

Major acquisitions have a reputation evidenced by research for destroying value and only rarely delivering the initial planned benefits. Reasons for failure include paying too much, poor integration, cultural and leadership issues and simply overestimating the benefits determining the bid price. Will this deal buck the trend?

The power of advertising

Big brand brewing is highly profitable due to scale and scope economies related to the size of the main players. However, it is their stranglehold on distribution through bars, restaurants, supermarkets and entertainment venues that prevents effective competition. The power of advertising together with product availability is highly potent – just ask Coca-Cola. A glance at AB InBev’s results shows that big brands are continuing to make ground, further limiting competition. Beer markets are falling in many countries. This is partly through the move to craft beers, together with the increasing popularity of wines and spirits.

Less consumer choice?

It is rare that the number one player in an industry buys the number two player, creating a worldwide market share of almost 30 percent in a consumer market. The global brewing industry is already concentrated, with the top five (soon to be four) sharing almost 50 percent of the market.

Research shows that less competitors in an industry results in higher profit and consequently less consumer choice. This merger is likely to further restrict consumer choice. It will also limit price competition in an industry already demonstrates stratospheric levels of profitability.

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John Colley is a professor at Warwick Business School and an expert on large-scale mergers.

** The views expressed here are not necessarily those of Independent Media.

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