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Flat Beer Sales Lead to Talk of Mergers

Posted on: Thursday, 29 May 2008, 12:00 CDT

The slow growth of beer sales in key markets, coupled with an insatiable need to slash costs, is sparking speculation about a new wave of brewing industry consolidation that puts particular pressure on Anheuser-Busch Cos.

On Wednesday, the Financial Times' Web site reported that London-based SABMiller PLC, owner of the Miller brand, would consider a buyout from Belgium-based InBev NV, the world's largest brewer by sales. That follows reports over the past several days that InBev is weighing an offer for Anheuser-Busch, the top U.S. brewer.

The companies aren't commenting. But if a big merger occurs, it could set off a wave of deals that would reshape global beermaking, analysts said, after a wave of larger companies taking over relatively smaller operations.

"What this really signals is that we are entering the next phase, where some of the giant players get together," said Benj Steinman, editor of Beer Marketer's Insights, a trade publication.

The beer industry has two faces, one young and vibrant, the other middle-aged. Sales of craft beers in the United States are rising at a brisk pace, roughly 12 percent annually in 2007. Meanwhile, countries with fast-growing economies -- Russia and China, for instance -- have developed a fast-growing thirst for beer.

But in the United States and Western Europe, the overall beer market has been flat, with sales in this country growing at a 1 percent pace in recent years.

"In any industry where you see a lack of growth, you'll see consolidation," said Jack Russo, a stock analyst at Edward Jones.

That's because most acquisitions are followed by cost-cutting aimed at boosting profitability. Jobs can be eliminated, overhead costs pruned. Indeed, the pairing of the U.S. operations of Molson Coors and SABMiller, announced last fall, was heralded with the promise of $500 million a year in cost savings.

Molson Coors and SABMiller are themselves products of big mergers in recent years. And all those combinations have given the globe's top five brewers half of the industry's market share, up from about one-third five years ago, Steinman said.

Miller and Coors are, respectively, the second-largest and third-largest U.S. beer operations, so their joint venture immediately renewed speculation that InBev would take a run at Anheuser-Busch, maker of Budweiser.

The rumor floodgates have since swung open: One merger would force more, as beermakers battle for economies-of-scale.

"Beer is a scale business," said Ann Gilpin, a stock analyst at Morningstar Inc. "In order to really generate profits, you need scale."

So, Molson Coors and SABMiller might be tempted to merge their global operations, while FEMSA, one of Mexico's two biggest brewers, would be ripe for sale, Bloomberg News reported. Or Anheuser-Busch, which owns 50 percent of Mexico's other big brewer, Grupo Modelo, could try to buy the rest of the company, a way to fend off InBev.

"There's so much conjecture," said Edward Jones' Russo. Beneath that, though, is the cold fact that Anheuser-Busch's stock has been a laggard in recent years, despite its efforts to broaden its reach.

The company has tried capitalizing on craft beer, introducing higher-end beers under its Michelob brand and buying stakes in two major U.S. craft brewers (and, in turn, owning a stake in Chicago's Goose Island Beer Co.). Still, those efforts aren't "enough to move the needle" at a giant like Anheuser-Busch, Russo said.

Anheuser-Busch also has tried to tap into foreign markets through Modelo, as well as via a stake in China's Tsingtao Brewery. Still, compared to its main global rivals, InBev and SABMiller, Anheuser-Busch has not been nearly as aggressive in expanding internationally, analysts said.

InBev is huge in Europe, Brazil and China, but a small force in the United States, where it is perhaps best known for its Beck's and Stella Artois brands. Anheuser-Busch would give InBev a huge footing in this country.

InBev -- known for wielding a budgetary ax -- would likely boost profits at Anheuser-Busch through cost cuts that could top $750 million a year, analysts said. "They are basically a bunch of machete-wielding investment bankers," Gilpin said of InBev.

The prospect of massive job cuts in Anheuser-Busch's hometown of St. Louis -- coupled with the sale of a famous U.S. brand to a foreign firm -- likely would weigh heavily on August Busch IV, the fifth member of his family to run the company.

But if it fails to strike a deal, one possible outcome isn't good, either. A merger between InBev and SABMiller would be a "nightmare" for Anheuser-Busch, Carlos Laboy, an analyst at Credit Suisse, wrote in a recent report. The company would face the prospect of getting "permanently boxed into an inferior and disadvantaged global footprint," Laboy wrote.

Plus, Morningstar's Gilpin noted, Miller would be a much fiercer competitor in the United States if InBev and SABMiller hooked up.

Gilpin and other analysts said leaked news about an InBev-SABMiller merger may be a strategic move by the former to get leverage with Anheuser-Busch. " 'If you don't let us buy you,' InBev is saying, 'We'll buy SABMiller,' " Gilpin said.

Source: Chicago Tribune

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