Would a combined Anheuser-Busch InBev/SABMiller signal the end of history?

Would a combined Anheuser-Busch InBev/SABMiller signal the end of history?

Finally, the moment everyone in the brewing universe has been waiting for has arrived, not with a thunderclap or volcanic eruption or heralds trumpeting, but rather with a prosaic exchange of email alerts.

"The Board of SABMiller notes the recent press speculation and confirms that Anheuser-Busch InBev has informed SABMiller that it intends to make a proposal to acquire SABMiller. AB InBev confirms that it has made an approach to SABMiller’s Board of Directors."

The apt analogy isn’t from nature or the arts – this is a sporting event. Boxing, the tapping of the opponent’s gloves before the bell rings to signal Round One, comes closest. In the world of brewing M&A activity, this is truly the title fight, the one that determines the World Champion. And, most likely, this will be forever and ever, for the combination of the world’s number one and two brewers will be a monster.

AB InBev produces around 410m hectolitres of beer annually worldwide; SABMiller clocks in at around 245m hl. Combined, their volumes will come in around 615mhl, assuming an almost certain disposal of SABMiller’s 58% equity stake in its American joint venture MillerCoors. It’s a figure that will dwarf the new number two, Heineken, at around 180m hl; and number three Carlsberg, at 135m to 140m hl.

But, beyond volumes, this play is really about market shares and market leadership. For starters, SABMiller fills in the map where AB InBev isn’t present: Australia, sub-Saharan Africa, Colombia and Peru in Latin America; parts of Eastern Europe, notably Poland, the Czech Republic and Romania; and strengthens its hand in the vast potential that is India (future) and China (present).

And, with few exceptions, the enlarged market leader will be able to claim the number one or number two spot in virtually every beer market that matters. (Exceptions: The UK, where it’ll be third ranked, and Russia, where being third, fourth or lower might well be considered a blessing.)

But, before just-drinks launches its 'Name That Company' contest, to reshape Anheuser Busch InBev-SABMiller into something less cumbersome – analyst Trevor Stirling at Bernstein refers to the combination as MegaBrew, a good first entry – for AB InBev to succeed, there are a number of hurdles to overcome.

Mind you, given that ABI’s bid is now public and in the offing, it may well be that a number of the answers to the following questions will become available in the coming days and weeks.

Firstly, there are regulatory hurdles. With MillerCoors claiming a 27% share of US beer sales, and Anheuser-Busch the country's market leader, clearly something has to give. It’s also a highly competitive market, with both imports and the much-noted growth in craft beer pushing down the fortunes of mainstream brands, notably Coors Light and Miller Lite. So, local knowledge is a plus – in short, it’s hard to see anyone more suitable than JV partner Molson Coors to step up. It’s a company with cash, ambition and, in all likelihood, will be legally guaranteed first right of refusal on SABMiller’s stake in the joint venture in the event of a takeover.

Then, there’s China. CR Snow, SABMiller’s joint-venture with China Resources Enterprise, has market leadership, albeit at a low 20% to 25% share. But, add ABI’s Harbin to this, and an enlarged Chinese footprint will be above 40% and pushing towards a majority share of beer sales. Will Chinese regulators move to block the deal? Possibly, especially when such a combination would harm the competitiveness of still state-owned brewers, especially Yanjing, and privatised Tsingtao. If the deal was blocked, would CR Enterprise acquire the SABMiller JV stake and be willing to go it alone? Unlikely; they wouldn’t necessarily have the required brewing expertise. No, the wild card bet is that, if China proved a complication, that there could be two bidders for the stake in CR Snow, and both would be good fits: Carlsberg and Heineken. The former is already present in Western China but lacks a national footprint. The latter is nowhere in China and this would be the ideal fit to enter the market in scale.

It’s possible. ABI has shown a willingness to divest to competitors – or create them, as has been the case with Constellation Brands acquiring the Grupo Modelo brands in the US in perpetuity following ABI’s bid for the outstanding Modelo shares.

Then there’s the question of shareholder intentions. There are two large blocks at SABMiller – Altria, with around a 27% economic and voting interest that it acquired when then SAB transformed itself by adding Miller back in 2002; and the Santo Domingo family with 14% economic and voting interests, held as a result of SABMiller’s acquisition of Bavaria in 2006.

While not in possession of any insider knowledge on this point, I think that neither of these parties would be interested in a cash-only offer. But, a mix of cash and shares, with a stake in the enlarged company? Now that’d be an interesting proposition.

Does ABI have the wherewithal to finance the bid? This is a non-starter as far as speculation goes. ABI will have cash, shares and the bank facilities to make it happen. The question will be what premium will be required above SABMiller's closing share price yesterday. Given the way SABMiller’s share price has reacted today it will need to be substantial.

And, this may be SABMiller’s best defence, a rising share price combined with shareholder loyalty. ABI’s first offer had better be close to, if not actually, its best. This does have a chance of slipping away on the financials.

Should ABI make this deal? Within the brewing industry it will be unassailable, unless some unlikely combination of Heineken or Carlsberg, Molson Coors, Kirin or Asahi and perhaps Diageo’s brewing assets was pulled together. And even as I typed this last sentence the likelihood of this ever happening – never, in other words – became apparent.

No, for M&A within the brewing industry, this is the end of history. The enlarged company would be unreachable by any of its traditional multi-national competitors.

The only real downside is that ‘MegaBrew’ will become the enemy that the craft brewing industry has always wanted. If you’re the small guy/good guy, you need a villain against which to project your fiercely-held independence. The sheer size of this enlarged company makes it an over-sized Goliath to craft’s David. This would be death competitively by a thousand paper cuts. But, if successful, this transaction would, in some manner, mark the high water-mark for the world's multi-national brewers – markets everywhere are tending to fragmentation and consumer experimentation.

For these trends, larger brewers are not so well equipped to compete. Not so many years from now, what's not to say that Heineken’s purchase of a 50% stake in US craft brewer Lagunitas will be seen as the better acquisition to have been made this dramatic September?

For just-drinks' full coverage of Anheuser-Busch InBev's approach for SABMiller, click here.