SABMiller steals march on rivals with Bavaria deal
Beating off competition from other major brewing groups, SABMiller successfully sealed the acquisition of the Colombian brewer, Bavaria, last week. Olly Wehring takes a closer look at a deal which has greatly enhanced the brewer's global profile and transformed the group's position in Latin America.
The announcement last week that SABMiller is to merge with Colombia's Grupo Empresarial Bavaria brought the curtain down on a protracted auction that has been running since the start of the year. When speculation broke in January that a race had begun for Bavaria, all of the world's top five beer groups were thought to be eyeing the Latin American brewer.
As contenders dropped by the wayside (InBev and S&N distanced themselves from the process in June), rumours intensified, suggesting it was a head-to-head between SABMiller and Heineken, with Anheuser-Busch remaining tight-lipped about its position. However, seeing how well SABMiller's CEO Graham Mackay got on with Julio Mario Santo Domingo, chairman of Bavaria, at last week's press conference suggested the two had got to know each other rather well in the last few months.
The terms of the deal, which sees SABMiller obtaining a controlling stake in the Colombian company in return for the Santo Domingo Group owning a 15.1% interest in SABMiller, show that this was no bargain. The South African group is paying US$7.8bn, which values Bavaria at about 10 times last year's EBITDA - earnings before interest, taxes, depreciation and amortisation - falling to less than nine on a prospective basis.
Mackay was quick to point out, however, that what SABMiller was getting for its money made the transaction very attractive indeed. "When it comes to brewers (in Latin America), they're all babes on the beach," he joked.
A quick look at Bavaria, which has been around since 1930 in Colombia, confirms that this is the biggest brewing transaction since the Interbrew/AmBev merger was completed in March. The company is the second largest brewer in South America, with lager volumes of around 27m hectolitres. In Latin America, Bavaria is the undisputed number one, with 99% market share in Colombia and Peru, 93% control in Ecuador and 79% market share in Panama.
Bavaria's net sales in the last 12 months hit US$2bn, with EBITDA reaching US$837m. Bavaria owns 16 breweries in the region, with a total capacity of around 40m hectolitres. The facilities are technically sound and well-maintained, SABMiller said, with rationalised production operations throughout the region. SABMiller was also impressed both with the brewer's top line and operating profit growth, as well as with its strong management track record.
The region itself also proved attractive to SABMiller. The Andean region has a population of 89m, with relatively low per capita beer consumption of 31 litres. Volumes are expected to grow at an overall rate of around 4% over the next five years. The transaction boosts SABMiller's global profile, therefore, giving it leading market positions in five continents (Europe, Africa, Asia and North America being the other four).
The acquisition also cements the London-based company's platform for further expansion, though Mackay indicated that in Latin America at least it would not necessarily be a prelude to further acquisitions. "The beer industry is consolidating on a global scale," Mackay said, "but this is not a deal (we have done) that leads to another deal. General economic growth in the region should underpin growth for us going forward."
Julio Mario Santo Domingo said that over the seven months since the auction began the group had thought long and hard about whom to side with. "The other offers were different, let's put it that way," he said. "We narrowed it down to three parties a couple of months ago. We were doing our own reverse due diligence (on the bids); that's why this has taken so long. We are very happy to be here today, and we think we have chosen the best partners available to us." Mackay later told just-drinks that there were actually "at least four offers" though unsurprisingly neither Mackay nor Domingo would put names to the rival bidders.
Looking forward, SABMiller has high hopes for what can be achieved in the region. Bavaria already has category leadership, and SABMiller sees the development of the newly-merged group's brand portfolio as a high priority, with Miller Genuine Draft being viewed as a prime candidate for introduction into the Andean market. By channelling marketing and management, and introducing operating efficiencies, SABMiller predicts cost synergies and operating improvements to the tune of around US$120m per annum by the end of the 2010 financial year. The operating profit impact of revenue enhancement initiatives is projected to be substantial.
"This is an extremely exciting and positive transaction for both parties," Mackay said. "We think the fit is unimprovable." Domingo echoed the sentiment: "Our decision to partner with SABMiller is the logical next step for Bavaria, and gives us a solid foundation for future expansion."
As Mackay noted, the brewing landscape has now changed in the Andean region. How SABMiller's competitors react to the transaction remains to be seen. As opportunities for acquisitions in developing markets diminish, and the stagnation in Western Europe and North America continues, SABMiller appears to have stolen a march on InBev, Anheuser-Busch, Heineken et al, in Latin America, at least. "I don't expect our competitors to be stung into a response (in Latin America)," Mackay said. The transaction serves to highlight, however, the scrap that is going on for footholds in emerging and developing markets and that fight will certainly continue for the foreseeable future.
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