thedude00
Well-Known Member
Found this surfing the web thought you guy may think its interesting
Earlier this year, I told you about a financial analyst’s pipe dream involving the sale of immovable object, SABMiller, to irresistible force, AB InBev. Well, it now appears as if SABMiller isn’t quite is immovable as we might have thought. The speculation of a few Credit Suisse analysts has gone from a “theoretical” whisper to a “might-actually-happen” full-throated roar.
The $80 billion deal would be the biggest cash deal…well…ever. It would involve the largest corporation in a highly profitable industry purchasing the second largest corporation in said industry and gaining entry into new markets while controlling the lion’s share of production of an immensely popular commodity. It would create an absolute behemoth…an impossibly wealthy, impossibly influential, impossibly massive beer empire that could essentially do whatever it wants. So am I worried?
Not at all.
Before we get to the ramifications of this deal for our beloved craft beer industry, let’s discuss the nuts and bolts of the deal. Check out my earlier post on this story to get a sense of how AB InBev operates. If you don’t feel like making the effort to click on that link *, allow me to summarize:
*I know…your finger is tired from picking your nose/playing Gears of War 3/changing the channel in disgust after watching yet another Red Sox loss.
AB InBev is a corporation that lives and breathes mega-deals. InBev (sans Anheuser-Busch) was formed in 2004 during a gargantuan merger between Belgium’s Interbrew (which, in turn, was born when Belgium’s two largest breweries, Artois and Piedboeuf, merged in 1987) and Brazil’s AmBev (which itself was created when Brazil’s two largest breweries, Antarctica and Brahma, merged in 1999). Four years later, InBev, then the largest brewery on Earth, bought up Anheuser-Busch, the second largest. The trend is fairly obvious here…every few years, the brain-trust at AmBev/InBev/AB InBev decides that they’re bored and need to buy out their biggest competition. This should come as no surprise to anyone that follows the business world. The Brazilians who helm the company are consummate deal-makers and, by all accounts, are exceptionally talented at such acquisitions. The pay down debt quickly, wring out incredible cost savings, and put themselves into position for the next deal much more rapidly than industry experts predict. Furthermore, they’re an enormous public company that has, for the most part, saturated every market they’ve entered. With global beer sales flat, AB InBev needs to come up with SOME way to increase their shareholder’s earnings…and that means buying up the competition. This plan has worked wonders for them and it would certainly work again in this case.
There are a few hurdles that need to be cleared for this deal to come to pass. First is the matter of AB InBev’s debt. They still owe massive amounts of capital thanks to their acquisition of Anheuser-Busch. But, as noted, they’ve done a remarkable job of paying down that debt in just three short years. Carlos Brito, AB InBev’s CEO, has noted that this mega-deal won’t be possible until the company’s debt to EBITDA ratio falls below 2. For those of you whose eyes glaze over when you see financial jargon like that, “debt to EBITDA ratio” is a fairly common metric that basically divides a company’s incurred debt by its EBITDA which is “Earnings Before Interest, Taxes, Depreciation, and Amortization”. It’s a rough way of measuring when a company will be able to pay off its debt (or of determining the probability that a company will default on its debt).* AB InBev’s debt to EBITDA ratio fell from 3.7 to 2.9 last year and Brito believes it will drop below 2 sometime next year. When that happens, this deal becomes a distinct possibility.
*I knew that year working in capital management wasn’t a total waste!
There’s another issue at stake, and that’s a legal one. In most of the world, this deal wouldn’t be a problem…but in the US and China, the anti-trust lawyers are already sharpening their knives. If AB InBev bought SABMiller as it currently exists, the new super-company would own about 80% of the American beer industry. That falls squarely into the “monopoly” category and the US government isn’t keen on handing over any red, plastic hotels right now…particularly to a company headquartered overseas. The same is true in China where SABMiller owns a 49% stake in CR Snow, the largest brewery in the country. AB InBev already has a substantial presence in China and their control of CR Snow would be too much for Chinese authorities.
These two obstacles are eminently solvable, however. In the US, SABMiller and MolsonCoors (two former, bitter rivals) formed a joint venture called MillerCoors in 2007 in order to survive against the Anheuser-Busch marketing machine. That joint venture expires in 2013, and at that time, SABMiller could simply sell their domestic stake of Miller (and thus, their 30% control of the US market) to their current partners at MolsonCoors. So while SABMiller would still own the Miller brand elsewhere in the world, domestically Miller would become the first of the former “Big Three” to be swallowed up by one of its competitors. You’d still see Miller on the shelves, of course, but, in essence, the Big Three would now be a Big Two…Coors and Bud (aka MolsonCoors and AB InBev). By relinquishing control of the American market, SABMiller would eliminate the concerns of anti-trust lawyers. The same could easily happen in China where SABMiller would simply have to sell their shares of CR Snow. With those two smaller deals done, there would be no more hurdles in the way of AB InBev’s acquisition of its biggest rival.
Whew…you got all that? It’s complicated and, frankly, a little overwhelming. On the surface, it seems like THE biggest story in the beer world. I mean…Bud buying Miller?! And Miller giving up their American market to Coors?! That’s crazy-talk! But the truth is, this kind of stuff happens all the time (though admittedly not at this scale) when companies enter the world of international finance and never-ending M&A deals. You can’t think of those companies as “Bud, Miller, and Coors…All-American beer!” anymore. Now it’s AB InBev, SABMiller, and MolsonCoors…three monstrous corporate behemoths helmed in Brussels, London, and Montreal respectively. So if you ignore the “nostalgia” angle, you’ll realize that this is just business.
The bigger question, as far as the Aleheads are concerned, is what this means for craft beer. You might think the tiny Davids would be quaking in their boots at the thought of the evil AB InBev Goliath growing even fatter and richer. But pay close attention to this quote from the article:
“SABMiller is attractive to AB InBev due to the London-listed brewer’s large operations in the high-growth emerging markets of Africa, South America and eastern Europe which will help AB InBev reduce its reliance on the tough U.S. beer market.”
And why, do you suppose, the US beer market is so “tough” for AB InBev? Sure, beer consumption in general has declined a bit in the US, but not enough to explain why sales of Budweiser have dropped 30% in recent years. No, the blame/kudos goes squarely to the craft beer segment of the industry which has seen a meteoric rise even as overall beer sales have stagnated. With American craft growing by double digits every year, AB InBev is scrambling to come up with ways to compete against the little guys in a US market that provides over 90% of the company’s earnings. They’ve cut production/distribution deals with companies like RedHook and Kona and earlier this year they snapped up Goose Island lock, stock and barrel. The problem is that Aleheads everywhere have seen through these transparent ruses and have vowed to eschew former craft breweries that have the stench of AB InBev on them (I, for one, haven’t consumed a drop of Goose Island since the deal went through in March). In other words, those in-roads into the craft beer world may look good on paper for AB InBev, but they’re simply not going to make up for the losses that the company is facing.
"http://aleheads.com/"
Earlier this year, I told you about a financial analyst’s pipe dream involving the sale of immovable object, SABMiller, to irresistible force, AB InBev. Well, it now appears as if SABMiller isn’t quite is immovable as we might have thought. The speculation of a few Credit Suisse analysts has gone from a “theoretical” whisper to a “might-actually-happen” full-throated roar.
The $80 billion deal would be the biggest cash deal…well…ever. It would involve the largest corporation in a highly profitable industry purchasing the second largest corporation in said industry and gaining entry into new markets while controlling the lion’s share of production of an immensely popular commodity. It would create an absolute behemoth…an impossibly wealthy, impossibly influential, impossibly massive beer empire that could essentially do whatever it wants. So am I worried?
Not at all.
Before we get to the ramifications of this deal for our beloved craft beer industry, let’s discuss the nuts and bolts of the deal. Check out my earlier post on this story to get a sense of how AB InBev operates. If you don’t feel like making the effort to click on that link *, allow me to summarize:
*I know…your finger is tired from picking your nose/playing Gears of War 3/changing the channel in disgust after watching yet another Red Sox loss.
AB InBev is a corporation that lives and breathes mega-deals. InBev (sans Anheuser-Busch) was formed in 2004 during a gargantuan merger between Belgium’s Interbrew (which, in turn, was born when Belgium’s two largest breweries, Artois and Piedboeuf, merged in 1987) and Brazil’s AmBev (which itself was created when Brazil’s two largest breweries, Antarctica and Brahma, merged in 1999). Four years later, InBev, then the largest brewery on Earth, bought up Anheuser-Busch, the second largest. The trend is fairly obvious here…every few years, the brain-trust at AmBev/InBev/AB InBev decides that they’re bored and need to buy out their biggest competition. This should come as no surprise to anyone that follows the business world. The Brazilians who helm the company are consummate deal-makers and, by all accounts, are exceptionally talented at such acquisitions. The pay down debt quickly, wring out incredible cost savings, and put themselves into position for the next deal much more rapidly than industry experts predict. Furthermore, they’re an enormous public company that has, for the most part, saturated every market they’ve entered. With global beer sales flat, AB InBev needs to come up with SOME way to increase their shareholder’s earnings…and that means buying up the competition. This plan has worked wonders for them and it would certainly work again in this case.
There are a few hurdles that need to be cleared for this deal to come to pass. First is the matter of AB InBev’s debt. They still owe massive amounts of capital thanks to their acquisition of Anheuser-Busch. But, as noted, they’ve done a remarkable job of paying down that debt in just three short years. Carlos Brito, AB InBev’s CEO, has noted that this mega-deal won’t be possible until the company’s debt to EBITDA ratio falls below 2. For those of you whose eyes glaze over when you see financial jargon like that, “debt to EBITDA ratio” is a fairly common metric that basically divides a company’s incurred debt by its EBITDA which is “Earnings Before Interest, Taxes, Depreciation, and Amortization”. It’s a rough way of measuring when a company will be able to pay off its debt (or of determining the probability that a company will default on its debt).* AB InBev’s debt to EBITDA ratio fell from 3.7 to 2.9 last year and Brito believes it will drop below 2 sometime next year. When that happens, this deal becomes a distinct possibility.
*I knew that year working in capital management wasn’t a total waste!
There’s another issue at stake, and that’s a legal one. In most of the world, this deal wouldn’t be a problem…but in the US and China, the anti-trust lawyers are already sharpening their knives. If AB InBev bought SABMiller as it currently exists, the new super-company would own about 80% of the American beer industry. That falls squarely into the “monopoly” category and the US government isn’t keen on handing over any red, plastic hotels right now…particularly to a company headquartered overseas. The same is true in China where SABMiller owns a 49% stake in CR Snow, the largest brewery in the country. AB InBev already has a substantial presence in China and their control of CR Snow would be too much for Chinese authorities.
These two obstacles are eminently solvable, however. In the US, SABMiller and MolsonCoors (two former, bitter rivals) formed a joint venture called MillerCoors in 2007 in order to survive against the Anheuser-Busch marketing machine. That joint venture expires in 2013, and at that time, SABMiller could simply sell their domestic stake of Miller (and thus, their 30% control of the US market) to their current partners at MolsonCoors. So while SABMiller would still own the Miller brand elsewhere in the world, domestically Miller would become the first of the former “Big Three” to be swallowed up by one of its competitors. You’d still see Miller on the shelves, of course, but, in essence, the Big Three would now be a Big Two…Coors and Bud (aka MolsonCoors and AB InBev). By relinquishing control of the American market, SABMiller would eliminate the concerns of anti-trust lawyers. The same could easily happen in China where SABMiller would simply have to sell their shares of CR Snow. With those two smaller deals done, there would be no more hurdles in the way of AB InBev’s acquisition of its biggest rival.
Whew…you got all that? It’s complicated and, frankly, a little overwhelming. On the surface, it seems like THE biggest story in the beer world. I mean…Bud buying Miller?! And Miller giving up their American market to Coors?! That’s crazy-talk! But the truth is, this kind of stuff happens all the time (though admittedly not at this scale) when companies enter the world of international finance and never-ending M&A deals. You can’t think of those companies as “Bud, Miller, and Coors…All-American beer!” anymore. Now it’s AB InBev, SABMiller, and MolsonCoors…three monstrous corporate behemoths helmed in Brussels, London, and Montreal respectively. So if you ignore the “nostalgia” angle, you’ll realize that this is just business.
The bigger question, as far as the Aleheads are concerned, is what this means for craft beer. You might think the tiny Davids would be quaking in their boots at the thought of the evil AB InBev Goliath growing even fatter and richer. But pay close attention to this quote from the article:
“SABMiller is attractive to AB InBev due to the London-listed brewer’s large operations in the high-growth emerging markets of Africa, South America and eastern Europe which will help AB InBev reduce its reliance on the tough U.S. beer market.”
And why, do you suppose, the US beer market is so “tough” for AB InBev? Sure, beer consumption in general has declined a bit in the US, but not enough to explain why sales of Budweiser have dropped 30% in recent years. No, the blame/kudos goes squarely to the craft beer segment of the industry which has seen a meteoric rise even as overall beer sales have stagnated. With American craft growing by double digits every year, AB InBev is scrambling to come up with ways to compete against the little guys in a US market that provides over 90% of the company’s earnings. They’ve cut production/distribution deals with companies like RedHook and Kona and earlier this year they snapped up Goose Island lock, stock and barrel. The problem is that Aleheads everywhere have seen through these transparent ruses and have vowed to eschew former craft breweries that have the stench of AB InBev on them (I, for one, haven’t consumed a drop of Goose Island since the deal went through in March). In other words, those in-roads into the craft beer world may look good on paper for AB InBev, but they’re simply not going to make up for the losses that the company is facing.
"http://aleheads.com/"
