The beer-all and end-all of mergers still has some way to go
It is a deal full of “biggests” and “evers” and “mosts”. The R1.4‑trillion proposed buyout of SABMiller by Anheuser-Busch InBev, which the SABMiller board agreed to in principle this week, will create a beer behemoth that straddles the globe.
But there is far to go before this giant becomes a reality.
Already there have been outright objections, and the ratings agency Moody’s put both companies’ ratings on review on Thursday while they thrash out the details of the offer.
The companies’ awareness of the many hurdles that will need clearing is expressed by a promised “reverse break fee” of $3-billion, which AB InBev will pay to SABMiller “in the event that the transaction fails to close as a result of the failure to obtain regulatory clearances or the approval of AB InBev shareholders”.
But the fact that AB InBev is ready to pay billions if the deal fails is also arguably an expression of its confidence that it can convince competition regulators and other interested parties around the globe that the deal will benefit everyone.
In South Africa, trade union federation Cosatu and one of its affiliates, the Food and Allied Workers’ Union (Fawu), have opposed the deal.
Caution is also emerging regarding how the government might view the merger, given the public interest in a company that has long historical ties to South Africa and that, according to Reuters, paid about R16‑billion in tax to the South African fiscus in 2014-2015.
In a statement, Cosatu called for the authorities to reject the deal because it could threaten the country’s tax base and workers’ jobs.
Iraj Abedian, the chief executive of Pan-African Investment and Research Services, said that, other than the initial capital inflow from the payment for shares, the deal would mean a regular capital outflow of dividends from South Africa every year.
“This is not good for South Africa’s balance of payments over the medium to long term,” he said.
The national treasury said in a statement that when it comes to cross-border financial flows, South Africa’s legislation requires that any significant cross-border transaction be approved by the minister of finance, Nhlanhla Nene.
The treasury said it was a matter of public record that conditions were imposed on SAB when it applied in the late 1990s to re-domicile to the UK and that such conditions generally relate to the public interest, and to the South African holding company’s operations and assets or any sales proceeds.
Nene would “apply his mind to any such application, to ensure compliance with existing conditions and the impact on the South African economy”, the treasury said.
The state-owned Public Investment Corporation (PIC), SABMiller’s third-largest shareholder, said it would prefer all shareholders to be “treated equally” and be given AB InBev common shares that rank on an equal footing with shares currently listed in Brussels, instead of the unlisted shares currently being offered.
The PIC also said it remained resolute that the new entity should be listed on the JSE and in a way that would allow SABMiller shareholders to benefit from future growth.
As Nomura analyst Peter Attard Montalto noted, this presumed there would be a liquid, unrestricted floating of shares on the exchange.
The South African government has played an active role in opposing large mergers, most notably when grocery giant Walmart bought local retailer Massmart in 2012.
The offer that the SABMiller board provisionally accepted on Tuesday priced the firm’s shares at £44 each, along with a partial share alternative for 41% of SABMiller, which was designed specifically for its two largest shareholders, the tobacco giant Altria and Colombia’s Santo Domingo family.
The United Kingdom’s takeover panel has also extended the deadline, until October 28, by which AB InBev must announce a firm intention to make an offer for SABMiller or walk away from it.
The two red-flag jurisdictions are China and the United States. In the US, AB InBev is the largest brewer and it goes toe-to-toe with MillerCoors, SABMiller’s joint venture with Molson Coors. In China, where AB InBev has a 15% market share, SABMiller has a joint venture with China Resources Enterprise in CR Snow, the producer of the world’s bestselling beer, Snow.
According to the research firm Euromonitor International, assuming the merged brewer shed both these interests, it would still be mighty. It estimated that the combined entity would be the third-largest in the Asia-Pacific region, with 12% of the region’s volumes. It would be number one in Australasia, with 40% of the volumes; number two in Eastern Europe, with 23%; and would hold first place in the Middle East and Africa, with 41% of the region’s volumes.
But the deal is more than just a bet on beer, as both companies are also involved in the soft drink market.
A competition lawyer who asked not to be named said SABMiller bottled for Coca-Cola in a number of jurisdictions, and AB InBev did it for Coca-Cola’s chief competitor, Pepsi. “In jurisdictions where they are not only competitors in beer but [also] in soft drink distribution, it’s a further thing to look at,” he said.
But, he said, AB InBev did not have a presence in South Africa, and there appeared to be little cause for concern over the impact the merger would have on local manufacturing capacity or value chains.
AB InBev has a reputation for relentless cost-cutting and the SABMiller acquisition gives it access to Africa, a prime growth market.
He said that despite the potential for delays, many of objections the state might raise may be cured with undertakings such as promises not to retrench workers or by agreeing to empowerment commitments.
In response to questions by the Mail & Guardian, AB InBev said it expected members of SABMiller’s management team and employees “to play a significant role in the combined company across the organisation”.
The company was “in the process of engaging with key stakeholders in South Africa to explain the strategic rationale and benefits of a potential combination”, it said.
It reaffirmed its commitment to a secondary listing on the JSE, a local board and keeping Johannesburg as the regional headquarters for the combined group on the continent. It also said it would continue with SABMiller’s broad-based black economic empowerment scheme.
But the acquisition is not cheap. AB InBev’s chief executive, Carlos Brito, said the company would fund it with its own financial resources and third-party debt.
Moody’s said its review would consider the “significant increase in leverage” that the partially debt-funded deal was likely to entail. It also flagged the execution risks associated with meeting regulatory requirements, including asset sales, the implication for various partnerships the companies have globally, integration risks and possible synergies.
Beer giant might lose world’s favourite brew
In creating the world’s biggest beer company, Anheuser-Busch InBev may need to let go of the planet’s bestselling beer, China’s Snow.
That’s among the probable outcomes Guotai Junan Securities anticipates in the wake of AB InBev’s agreement to buy SABMiller for $106-billion. Analysts at the Goldman Sachs Group, BNP Paribas and Daiwa Capital Markets have also pointed out the likelihood of such a scenario in recent notes to clients.
The idea is that the merger would give the Belgian company about 40% of China’s beer market – too much for regulators’ comfort – and result in the disposal of a joint-venture stake back to China Resources Enterprise. SABMiller’s 49% stake in the venture, called China Resources Snow Breweries, could be worth about $5-billion, according to Nomura Holdings.
“Antitrust issues would be the biggest barrier for the purchase,” said Guotai Junan’s Andrew Song. “If the deal is completed, the combined market share of AB InBev and China Resources may trigger an antitrust review.”
For the maker of Budweiser, unloading the Chinese venture would be akin to forfeiting leadership in a market that researcher Euromonitor estimates will grow more than 50% to 279.7-billion yuan by 2019. Snow, which had a 23% share of China’s market last year, outsells all other beers globally after overtaking Bud Light in 2008, and the company produces enough liquid to fill about 12 Olympic-sized swimming pools every day, according to SABMiller’s website.
Vincent Tse, a spokesperson for China Resources Enterprise, declined to comment on how an AB InBev-SABMiller deal would affect his employer. The company will respond accordingly based on the merger conditions and China’s anti-monopoly law, the chief financial officer, Frank Lai, was quoted as saying by Hong Kong’s Apple Daily.
AB InBev has thought through the regulatory implications of the proposal and the company would seek to resolve any contractual or regulatory issues if they emerge, said Karen Couck, its spokesperson.
If the stake is for sale, potential buyers could include Heineken, which has no presence in China, and Kirin Holdings, China Resources Enterprise’s joint venture partner in soft drinks, Nomura analyst Satoshi Fujiwara wrote in a report.
The AB InBev-SABMiller deal will be closely watched by Chinese regulators, said Zhaofeng Zhou, an antitrust lawyer at law firm Bird & Bird in Beijing.
China has blocked deals involving foreign companies before, though not often. In 2014, it rejected a proposed three-way alliance between the Danish shipping line AP Moeller-Maersk, Dublin-based Mediterranean Shipping and the French shipping company, CMA. The most high-profile case was in 2009 when it barred Coca-Cola’s $2.3-billion bid for the China Huiyuan Juice Group.
But, in 2008, China gave a conditional approval for InBev to complete its $52-billion takeover of Anheuser-Busch, barring the acquirer from raising stakes in existing units or buying shares of new brewers, including the maker of Snow beer.
China’s ministry of commerce, which reviews the legality of mergers, didn’t immediately respond to faxed queries.
“As long as they are prepared to divest their investment or their shares, I think it should be okay although it’s really hard to say because this deal is massive,” Bird & Bird’s Zhou said.
SABMiller has been producing Snow beer with China Resources Enterprise since 1994. Should AB InBev be forced to sell, China Resources Enterprise is likely to buy the stake from the brewer because of the sales potential in the world’s second-largest economy, said Duncan Fox, an analyst with Bloomberg Intelligence.
“If the economy grows, they should be the main winner,” Fox said. “Have they learnt all they can from the joint venture with SABMiller? Probably yes.”
After China Resources Enterprise, Tsingtao Brewery was the second-largest beermaker in China last year with an 18% share by volume. AB InBev, whose brands include Budweiser, Harbin and Sedrin, ranked third with 14%, according to Euromonitor. – © Bloomberg
Heineken up to mega challenge
Heineken is the odd one out in the world’s biggest beer merger, and that suits it just fine.
The world’s third-largest brewer is set to face a much larger rival as AB InBev and SABMiller prepare for their gargantuan $106-billion merger. There’s no doubt that the competition is going to get bigger, stronger and more efficient for Heineken. But the brewer seems up for the challenge.
Consider this: Heineken was one of the few big European brewers to increase sales in Europe in the first half of the year amid price competition and sluggish demand.
Analysts estimate the brewer will boost global revenue by 14% to about €22-billion by the end of 2017 – and that’s without a mega-merger to inflate its numbers. Matching MegaBrew’s size will be impossible for Heineken, with a market cap of $49-billion. But there are benefits in staying smaller and nimbler.
Maybe Heineken knew what it was doing when it rejected SABMiller’s advances last September, choosing to stay independent. While AB InBev and SABMiller are occupied with digesting their massive deal, Heineken will be in a prime position to make the acquisitions its rivals are too distracted to consider.
The growth in beer right now lies primarily in craft brews and regions such as Africa and Asia, where the drinking population is still expanding. There are many small operators up for grabs that could help boost Heineken’s growth without breaking the bank. That’s not counting the assets AB InBev and SABMiller will have to divest to win over regulators. The company has already taken advantage of the reduced competition in the merger and acquisitions market. Last week, it agreed to pay $781-million to take control of brands such as Jamaica’s Red Stripe beer and Malaysia’s GAPL from joint-venture partner Diageo. That followed a September agreement to buy a 50% stake in craft brewer Lagunitas.
Shareholders are backing the independent route. Heineken’s stock has gained about 27% since it shunned SABMiller – almost double the gains for SABMiller over that stretch. Remember, SABMiller, not Heineken, is the one that just agreed to a big premium.
MegaBrew had better watch out for the little guy. – © Bloomberg