Business Reporter Interviews Danny A Davis

The impressive numbers behind SABMiller’s merger with Anheuser-Busch InBev

The proposed merger between Anheuser-Busch InBev (AB InBev) and SABMiller merger is set to become the fourth-biggest corporate deal in history, and will create the world’s largest consumer staple maker – currently being talked up as the “megabrew”.

The two firms make some of the world’s most famous brews. The AB InBev range includes Budweiser, Corona and Stella Artois, while SAB Miller’s products number popular brands such as Peroni, Grolsch and Pilsner Urquell.

The deal, still subject to regulatory approval, has been valued at £68billion and is expected to be completed in the second half of 2016. For AB InBev, the rationale behind buying SABMilller is to create a global beer company that will give the combined group access to high-growth regions in Africa, Asia and Central and South America.

Dr George Alexandridis, associate professor at the ICMA Centre at Henley Business School, says: “This is more of a strategic move to tackle the diminishing profits AB InBev has been subject to in the US. There has been an increasing demand for imported beer in the US – wine and other spirits and so on. This is impacting the bottom line of big beer brewers.

“SABMiller brings more long-term growth potential to AB InBev. In particular AB InBev will be buying into Latin American countries, Colombia, Peru and – very importantly – Africa. SABMiller enjoys a very substantial presence there. The middle class in Africa is growing fast. It is a very up and coming beer market – Africa is the next big thing when it comes to beer. In a way, this deal may help AB InBev to resuscitate its revenue growth.”

Although there has been much talk about what the deal will create, it is by no means complete. In order to finalise the merger, the two companies still have to undergo regulatory approval in all the different countries they are based in.

So far, to appease the regulators in the US, SABMiller has sold its interest in MillerCoors to Molson Coors. Alexandridis says: “The anti-trust issues here are much more geographically diverse and complex than the previous deals the company has done. The market is placing a 70 per cent probability that the deal will be completed.

“The deal is far from done. Right now SABMiller is trading for around £40 a share – if you look at the price of the bid it is £44. That reflects the uncertainty that the deal be completed because of regulatory obligations.”

One area Alexandridis believes could be a concern is China. He explains SABMiller has a stake in Snow lager in China and is likely to have to sell that in order for the Chinese authorities to grant its permission for the merger. “In South Africa the big problem is the unions have opposed the deal because SABMiller was founded 120 years ago and remains a major employer there,” Alexandridis says. “There are other smaller problems – for example, SAB is a major bottler for Coca-Cola in Africa and AB InBev is a bottler for Pepsi in Latin America.  The combined company will not be able to continue to collaborate with both. There are a lot of issues to be resolved.”

Generally, though, Alexandridis thinks the market is positive as the AB InBev share price tells a different story. “If you look at the market it is particularly upbeat about this deal to create value for the acquiring firm’s shareholders. AB InBev stock price is more than 18 per cent up since late September when the rumour broke out – 10 per cent more than the market in Belgium. All this corresponds to about €30billion of value creation for their shareholders. This is pretty unusual because mega deals will typically see a moderate increase in the stock price, if not a decrease around the deal proposal.”

If the deal falls apart, it would be very costly for AB InBev. The brewer will have to pay $3billion to SABMiller, ahead of any other fees it has to part with to consult with bankers. Once the merger is complete, streamlining of operations and cost-cutting are expected. According to Alexandridis, 35 to 40 per cent of the £920million in savings AB InBev has identified will come from tackling overlaps at corporate and regional headquarters. The deal will mean job losses and office closures in the UK.

“SABMiller employs about 800 people in the UK, with most in Woking and about 30 in the London office, so nobody knows at the moment what will happen to those,” Alexandridis says. “I suspect we are going to see many jobs lost. AB InBev is renowned for its focus on controlling and cutting costs. All of its management travel economy class in non-transatlantic flights and they stay in modest hotels.”

Other synergies AB InBev will drive include procurement and engineering, where there will be a combined sourcing of raw materials and packaging and a re-engineering of associated processes. There will also be an alignment of brewery, bottling and shipping productivity as well as cost-management efficiency improvements and productivity enhancements across the group’s administrative operations.

M&A and integration expert Danny A Davis says: “There will be a period of uncertainty, where people just don’t know what is going on. That really causes people problems. The customers and employees will start to think about what is going to happen. The suppliers will start thinking about it and people will start to figure out what they should be doing to have their best interest at heart.  Sometimes competitors use it to their advantage. If there are some key employees you would like to look at, there is a substantially better chance of stealing some.”

The mega deal is also likely to prompt other brewers to consider acquisitions. It is possible, Alexandridis says, that major competitors such as Carlsberg and Heineken “may reconsider their strategic reach” as well if the deal goes through.

He does not expect there to be a deal between Carlsberg and Heineken, but they could focus on smaller players to enhance their advantage. He believes a potential pair could be Heineken and Molson Coors, although these are only rumours.

In the meantime, assuming the AB InBev/SAB Miller merger happens, it will change the brewing industry as we know it.

 

Article published by Business Reporter; 3rd December 2015; written by Joanne Frearson

http://business-reporter.co.uk/2015/12/03/the-impressive-numbers-behind-sabmillers-merger-with-anheuser-busch-inbev/