News this week that SABMiller and Molson Coors are to team up in the US beer market may have caught the industry by surprise, but the logic is compelling. As Olly Wehring reports, not only can the deal provide a boost to the country's number two and three brewers but it offers a significant challenge to Anheuser-Busch too.

Given that it seems to make so much sense for the two brewers involved, the news this week that SABMiller and Molson Coors are to merge their US and Puerto Rican operations shouldn't have been a surprise, although if we are all honest it was.

The deal brings together the second and third largest brewers in the US - a sure sign of the continuing pressures the US brewing industry is facing from changing consumer demands and a consolidating retail and wholesale horizon.

As Pete Coors, Molson Coors' vice chairman, puts it: "This transaction is driven by the profound changes in the US alcohol beverage industry that are confronting both of our companies with new challenges. Consumers are broadening their tastes and are increasingly looking for greater choice and differentiation; wine and spirits companies are encroaching on traditional beer occasions, and global beer importers and craft brewers are both taking a larger share of volume and profit growth."

As a consequence its hard to disagree with both sides when they proclaimed themselves "delighted" by the creation of the joint venture, known as MillerCoors.

At its most basic level, as one analyst told just-drinks, this deal delivers scale.

With Anheuser-Busch accounting for around 50% of the beer market in the US, the newly-merged unit will account for a combined share of a shade under 30% and the two brewers will be able to compete far more effectively with their giant rival.

"The joint venture will be positioned to respond more effectively to the needs of a consolidating distributor and retailer market, as well as to the cost pressures in the industry," the two brewers said.

Linked to this is the attractive possibility that the venture will help boost margins, a facet of the industry where both Miller and Coors have fallen well short of A-B. The US giant's operating margin in the US currently runs at around 23.6%. SABMiller and Molson Coors both operate at less than 10%.

The combined force will be able to wield significantly more muscle, giving MillerCoors much more bargaining leverage with media groups, which in turn will allow it to negotiate lower advertising rates and sponsorship deals.

The potential synergies within the joint venture also suggest both sides are justified in celebrating the deal. SABMiller and Molson Coors expect the transaction to generate around US$500m in annual cost synergies, to be delivered by year three, from a cash outlay of around $450m. Speaking to journalists on Tuesday (9 October), Molson Coors' chief executive, Leo Kiely, said that there were no plans to close any of SABMiller's six or Molson Coors' two breweries in the US. Targeted areas for savings include brewery optimisation, reduced shipping distances and back office efficiencies.

So, everyone's a winner - so far.

The balance of favour, however, tends to slip a little in SABMiller's direction, when you take a step back and survey the broader picture. For starters, by linking up solely in the US, the London-based brewer steers clear of having to deal with Molson Coors' operations in Europe, which are a lot of hard graft for less than explosive returns.

Molson Coors' operations in the region are certainly high profile - see Carling in the UK, for example - and generate quite some turnover - 24% of the company's revenue last year. However, when it comes to pre-tax profit, all these sales resulted in only 9% of the group's profits in the period.

There have also been rumblings from spectators that the creation of the US joint venture acts as an admission by Molson Coors that the 2004 merger of Coors in the US and Canada's Molson has not been the success the company hoped. One observer even went so far as to describe the creation of MillerCoors as being "as much a de-merger as a merger, with Coors essentially being separated from the old Molson".

Naturally, Molson Coors doesn't see it that way. "This is a great deal for both companies," a spokesperson told just-drinks. "It strengthens Molson Coors, not only in the aggressive US market, but also in our operations around the world."

The success of this venture is of course not assured. Firstly, it has to pass through the competition regulators unscathed - an event that is not guaranteed - and secondly, even a 30% market share may not be enough to deal with the continually toughening landscape in the US.

What is assured is that should the deal pass the watchdogs unharmed, it will change the competitive landscape significantly, and 24 hours on from the announcement there are already calls for Anheuser-Busch to respond.

Anheuser's reliance on the US market - it sells two-thirds of its beer there - makes any move like this significant, even if it remains easily the number one there.

Investors appeared unfazed by the MillerCoors news with shares of Anheuser-Busch Cos falling less than 1% in the hours after the announcement. But that hasn't stopped some analysts speculating that the giant will have to merge to protect its exalted position.

"Anheuser will likely feel significantly increased domestic competition, which could potentially result in a much-speculated merger with InBev happening sooner rather than later," a UBS analyst, Melissa Earlam, said in a note. "We also expect Scottish & Newcastle bid speculation to reignite."

A-B CEO August Busch IV was reported to have told employees that a "timely opportunity'' for Anheuser may arise out of any disruption created by the formation of the MillerCoors joint venture.

"There will be significant transition confusion from this change, and it's up to us to capitalise on this disruption now,'' he was reported to have said.

That offer hope for the short term, but a stronger and more focussed number two is going to have implications for A-B and the US beer industry as a whole for years to come.