Though feigning lack of interest, SABMiller, the world’s third-largest brewer, is preparing for its toughest battle in a decade. On Thursday CEO Graham Mackay unveiled a top-drawer set of financial results for the year to March and down-played the question that was uppermost in the mind of the market.
The company was asked how it would take on United States-owned Anheuser-Busch — makers of Budweiser and the brewer immediately above it in the global league — in what could be a bruising battle for Chinese brewer Harbin.
SABMiller’s response included tabling an above-market price offer for Harbin earlier this month and making other acquisitions through an associate in China.
The markets responded in kind, boosting SABMiller’s share price by 6% to trade at R78,40 after lunch on Thursday.
In the year ahead, the group must also prepare for new competition in its backyard. Namibian Breweries is spearheading a joint venture with Daego to set up a rival brewing operation in South Africa. It has the Heineken brand.
The Chinese battle lines were drawn at the end of April when Anheuser-Busch took up a 29% stake in Harbin. SABMiller had taken exactly the same last June — leading analysts to wonder whether it was distracted by its activities in other countries.
In response, SABMiller made a buy-out offer of HK$4,30 a share in a bid to swallow all other shareholders in the group, including Anheuser-Busch.
Nico Lamprechts, a brewing analyst at Merrill Lynch, described the offer as “overpaying to maintain” a foothold in the Chinese market, one of the world’s fastest-growing.
Lamprechts values the offer at $45 a hectoliter, which is above the $30-a-hectoliter valuation he puts on SABMiller’s Chinese investment. This represents a 33% premium on an equity basis.
Analysts expect a counter-offer from Anheuser-Busch, with markets resigned to the reality that the winner will take all at a higher price.
Harbin management has openly supported Anheuser-Busch as a new parent. Anheuser also have a stake in Tsingtao, brewers of a mineral water-based beer brand of the same name, which has a market share of 12,9% and is the largest in China.
In a conference call from London on Thursday, Mackay prefaced his analysis of China by reminding his audience that SABMiller has been in China for 10 years and has a 49% holding China Resources Breweries (CRB), which owns key brands Snow and Lanjian. With a market share of 10%, SABMiller owns 32 breweries in the country. On Tuesday CRB announced the acquisition of two breweries in China’s Anhui province.
Noting that he had CRB’s backing on the offer for Harbin, Mackay said his company was the “next logical” parent of Harbin because of a strategic and geographical fit.
Claiming to be bound by Hong Kong Stock Exchange regulations, Mackay noted that details of the Harbin offer would be tabled shortly. He remained confident of the business prospects “whatever the outcome of the Harbin transaction”.
China, a country of a billion people boasting a prolonged economic boom, is becoming one of the world’s important beer markets. The market is said to be growing at between 5% and 6%, and is now believed to be the largest by volume.
Yet, at $440-million, it has only 10% of the value of the US market, still the world’s most important. Much of SABMiller activity over the past year derives from the US. Last May the group unveiled a three-year turnaround strategy, and on Thursday, Mackay asserted that it was “halfway through” the process. The key component of the strategy has been invigorating Miller brands.
This financial year Miller Lite performed well, admittedly fuelled by a shaky base of fads like the Atkins diet. Mackay conceded the fickle nature of the base. However, he maintained the group would capitalise on the momentum of the US operation, but look for a more broad-based growth across all Miller brands.
The North American operation saw shipments fall 0,8% and brought in revenue of $4,7-billion, about a quarter of the group’s $12,6-billion.
Another turnaround tale for the group has been Italy’s Birra Peroni, which Mackay described as being “where Miller was a year ago”. The Perroni brand is now one of SABMiller’s portfolio of global brands.
South America remains driven by what Mackay called “a 4×4 strategy”. This involved exploiting synergy across beer and soft drinks, as well across the Honduras and El Salvador borders.
A key development has been the inclusion of some of the group’s East European markets in the European Union, which Mackay expected to “experience short-term disruption but long-term consumption growth”.
In Poland, SABMiller had seen a simple market grow into a sophisticated, fragmented one, a trend which Mackay proudly proclaimed had been foreseen by the company.Â
South Africa continues to be a key driver of SABMiller’s earnings. Mackay noted that the beer segment grew for the first time in many years, regaining market share from wine —especially cheap wine — and spirits.
Revenue from Beer South Africa grew from R1,2-billion to R1, 7-billion, or 55%. Other interests, such as Amalgamated Beverage Industries, Appletiser and spirit brewer Distell, contributed R1,1-billion in turnover, an increase of 49%. Mackay rated strategy above economies of scale and powerful brands as the key to running a brewing business.
SABMiller has moved to more than 40 countries by soothing the hostility of foreign enterprises and refusing to trample on local brands, instead enhancing them and showcasing them in its international range.
It has certainly been one of the best shares to buy over the past year. Basic earnings per share grew 97%, from 27,5 US cents to 54,1 US cents.
Dividends have grown 20% to 30 US cents a share, while operations have generated a cash flow of $2,2-billion. Part of this will be used to take on China.