AmBev merger complete but integration will take time
Preparing for free trade throughout the Americas by the year 2005, the Economic Defence Administration Board (CADE) has confirmed that it will not create barriers that will prohibit Brazil from restructuring in order to compete in a global economy. Due to MERCOSUL developments, specialists of Brazilian market trends have predicted that a national merger of the two largest breweries in Brazil will not have the negative effects on prices or national competition that would have occurred only a few years back. Even so, the CADE officials were wary of allowing two national competitors to merge. During months of deliberations they evaluated the effects of not only allowing a company to hold a large local market share, but also the implications of submitting the national industry to a Darwinistic global economy. The final approval to align the two largest breweries in Brazil in late March marked the beginning of a new phase in a recovering Brazilian economy.
Since plans for the merger were announced by Antartica and Brahma in July 1999, the third largest beverage company in Brazil, Kaiser with 36% of the market share, was blown away by the proposal to create a mega-company like AmBev. The president of Kaiser, Humberto Pandolpho, explicitly stated that concentration in the market would not benefit the consumer nor the local companies that would have to sacrifice their margins in an eventual price war. Throughout last summer, both radio and television stations were inundated with propaganda for the newly formed company, AmBev, and the adamant competitor, Kaiser, as each fought for consumer support. Since the approval of the merger, one of the provisions of CADE ruling allows the now second largest producer eight months time to contest the accord.
With this in mind, Kaiser is taking a passive approach to combating what they consider a monopoly and are carefully monitoring the industry developments according to a company spokesman. After first quarter results, the merger did not have a dramatic effect on Kaiser's sales or market share holdings. However, this upcoming summer will be the true test of both companies market presence and consumer preference. Kaiser does not want a price war with AmBev and this week will be starting its new campaign independent of the influence of the merger.
In agreement with CADE, AmBev will sell five of its factories in each geographical region in Brazil, including the Bavaria brand, within the next eight months. It will also publicly offer facilities that are scheduled to close within the next four years. The various entities sold by AmBev are equivalent to 12% of the market share. AmBev must also partake in distributing products for regional companies with less than 5% of the market. The new company must also offer relocation packages and training opportunities for its employees that will be without jobs. Although the restrictions surpassed the expectations of AmBev executives, the holding company currently boasts 55.1% of Brahma's and 100% of Antartica's earnings, and plans to control 50% of not only the national market but also the South American market by 2005.
Well on its way to reaching that goal, first financial results show that sales totaling R$1.23 billion were 6.9% above first quarter results in 1999. By volume, AmBev sold 15.8 million hectoliters of beer in its active markets and in Brazil sales reached 3.1% over last year. The increase in beer sales was a direct result of distribution improvements and price realignment as a result of the devaluation of the Brazilian Real against the US dollar. In an effort to cut costs, the company is restructuring its liabilities maintaining its debt ratio in hedged foreign currency.
"Since we agreed to CADE's terms, we have worked quickly to integrate the two companies," according to financial and investor relations director, Felipe Dutra. "We are also analysing the timely sale of Bavaria." Using strategies that made Brahma a success, AmBev plans to offer the lowest priced product in the world, efficiently maximize distribution channels and ultimately consolidate the beverage industry in Latin America. Over the next five years, AmBev will be required to report its quarterly results to the CADE counsel which will closely monitor the development of the new company.
Although Antartica and Brahma are still operating as separate entities, the creation of AmBev is a landmark decision which will greatly effect the future of business in Brazil. As the country prepares for free trade throughout the Americas in 2005, only time will tell if this developing economy will benefit from the new era of mergers and acquisitions.
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