SABMiller slakes thirst Down Under

Why did they do it? Acquire Foster’s, that is. This is the question echoing through my head after spending most of a day going through SABMiller’s website and press cuttings.

Yes, on the broadest level the rationale of world’s second-largest brewer in any merger or acquisition is to do so “where we can add value”.

And yes, SABMiller can doubtless add value to Foster’s, especially given that it has denied that Foster’s problems have anything to do with its management so frequently that it is safe to assume there will, in fact, be some radical management changes.

Ultimately, SABMiller is primarily an alcohol supplier—with additional large interests in fizzy soft drinks and small interests in gaming. It is not a moral business, so it is really not necessary to admire the group fundamentally.

But you have to admire SABMiller for its methods, goals, dynamism, discipline and marketing expertise.

As a South African, particularly, you have to admire the company because it is at the apex of South African business achievement—even though, ahem, it is no longer a South African company.

Its successes, despite the complexities of its operations in many different parts of the world, and its advanced systems—not least its human performance management systems—are really quite breathtaking.

The SABMiller empire had, in the year that ended March 2011, 200 beer brands, only four of which the group has made into international brands—Peroni Nastro Azzurro, Pilsner Urquell, Grolsch and Miller’s Genuine Draft, and 70 000 employees in more than 75 countries.

In this period group revenue was $28.3-billion and group earnings before interest, tax and amortisation was $5-billion.

So SABMiller must have something to contribute to Foster’s. Chief executive Graham Mackay has confirmed this by saying that the company will improve Forster’s underperforming brands, restructure parts of the business, save costs, focus on new, profitable market segments and bring in the benefits of global scale. It is a set of strategies and actions in which SABMiller has proven capabilities.

But when all is said and done, after SABMiller has “added value” to Foster’s and improved its efficiencies—and paid the huge price for this acquisition—it will wake up with an Australian brewing company in bed next to it.

After all, Australia is fundamentally a developed, mature, slow-growth market and Foster’s is on very high margins even without SABMiller adding value.

And although SABMiller is indeed an outstanding company, even it cannot force mature markets to grow.

This is not because South African companies have often not had good experiences in Australia. And it is not because South Africans have a natural broedertwis (rivalry) with Australians, of which most Australians are probably unaware.

It is just that Australia has a total population of only 22-million people and no big potential markets contiguous to it, except Muslim Indonesia with a population of more than 220-million.

Nowhere else in the world is SABMiller in a populous Muslim country, so Indonesia does not seem to be its real agenda.

Chris Gilmour of Absa asset management does not agree that Australia is mature or slow growing. He says its population is increasing relatively fast, particularly through immigration from the East, and that the dynamics of wine versus beer in the Australian market are changing in beer’s favour. He says although Foster’s is a proud, veteran brand, it has not had much success in premium beers and SABMiller has a lot to contribute.

But all that seems relatively marginal. Although SABMiller would say that it is keen to be involved in both emerging and developed markets, its experience in the former has been much more positive.

A world of opportunities
SABMiller’s earnings before interest, tax and amortisation (Ebita) in the past year are a good reflection of the relative merits of its major operating regions.

Overall, Ebita in the year to end March 2011 grew 12% (on an organic, constant currency basis)—a remarkable achievement in these times and a good reason why the share currently trades at a price-earnings ratio of around 24.

Asia’s Ebita increased by 33%, with robust volume growth in China and India; Africa’s Ebita increased by 20% owing to strong volume growth and increased capacity; North America’s Ebita increased by 20% thanks to cost savings in the face of slightly negative volume growth; Latin America’s Ebita increased by 11%; and Europe’s Ebita increased by 4%.

The Latin American operating region made the largest contribution to SAB’s Ebita bottom line with $1.6-bn—over 60% higher than the South African market achieved. SAB has operations in El Salvador, Honduras, Panama, Peru, Ecuador and Colombia, and it is the leading brewer by market share in all of these locales. It is currently listed as the third-largest brewer in Argentina. SAB also owns extensive Coca-Cola bottling operations in some of these Latin American countries.

South Africa, with an Ebita of $1-billion, is the second-largest contributor to SAB’s Ebita. The group is still the largest distributor of lager and soft drinks in the country, and is reportedly staging a comeback in the premium beers market.

Europe contributed an Ebita of $900-million, where it has operations in primarily former communist countries such as the Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Ukraine. It also operates in Italy, Spain and the Netherlands. SAB is the leading brewer by market share in most of these countries. It also exports to the British and German markets.

The United States market, with an Ebita of $700-million, showed lower volumes in line with higher levels of unemployment and an increase in the petrol price.

Africa, which contributed $600-million in Ebita, was the focus of an intense campaign that focused on improving marketing and exposure, and affording increased access of SAB products to the continent’s poor. The results have been positive and SAB believes there is still much growth needed.

The company plans to decrease its pack sizes, use local ingredients to drive down prices and further improve its logistics. It also plans to expand across the continent by acquiring breweries in other African countries. Africa has been the company’s most consistent market in terms of growth.

Asia’s Ebita growth may have been the strongest, but it contributed only $92-million. However, SAB speculates that there is room for further expansion in these markets. Its partnership with China Resources Enterprise has resulted in CR Snow, the largest brewer in China and now the biggest beer brand in the world, despite the Chinese market being extremely competitive.

SAB is the second-largest brewer in India, and has an operation in Vietnam, as well as a joint venture in Australia. It also exports significant volumes to South Korea and Taiwan.

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