July 14, 2008

Beer’s Been Going Global for Years

By Theresa Howard

Anheuser-Busch may be late to arrive to the global beer consolidation party, but the brewer plans to arrive with a splash and $52 billion in a cash buyout from Belgian brewer InBev.

A combination of Busch and InBev would create a new global King of Beers, producing more than 357 million barrels a year. And a merger would move SABMiller to a distant No.2, with more than 200 million barrels. A combined entity would let the Belgian brewer bolster its brands, including Stella Artois and Beck's in the U.S., while trying to grow A-B's brands around the world where Anheuser-Busch has just an 11.5% share compared with nearly half of the U.S. beer market.

After a month of trying to get a better price for its 156-year-old company, the A-B board has opted to join the global consolidation movement. Industry giants around the world and brewers face continued cost pressure with rising prices for the commodities they use in their products. Anheuser-Busch expects the cost of goods sold to rise 3% to 3.5% per barrel this year after first-quarter costs rose 2.3% to $2.6 billion.

"Anheuser-Busch would have run the risk of becoming the next GM, where market share in the 50s may dwindle down into the teens," says Robbert Van Batenburg, a beverage analyst at Louis Capital Markets. "You would have had a strong SABMiller, InBev on a mission to penetrate the U.S. and continued growth of smaller brewers. It has become a very consolidated space, and A-B doesn't have the opportunity to grow that much."

A-B's stock price has been flat for five years as brewers consolidated and as beer volume for big domestic brews languished while premium imports, small craft beers, and wines and spirits kept growing.

Coors Light has been the strongest domestic brew, with volume up 6.6% in the first quarter. That brand was recently folded into SABMiller, formed in 2002 when South African Breweries bought Miller Brewing. SABMiller got regulatory approval on June 5 by the Department of Justice to merge its U.S. operations with No.3 Molson Coors to create MillerCoors. The combined entity has sales of $10 billion in the U.S. Molson Coors was created in 2005 with the merger of U.S. operations for Molson and Coors.

In January, Belgium's Carlsberg and Dutch Heineken bought the U.K.'s Scottish & Newcastle in a $15.6 billion deal that included Newcastle Brown Ale and 50 smaller brands. InBev was created in 2004 through a deal between Interbrew, the world's third-biggest brewer, and Brazil-based AmBev.

While rivals have been growing through global deals, Anheuser-Busch has maintained market share through its core Budweiser and Bud Light brands. In 2007, sales of core brands in the U.S. accounted for 64.6% of worldwide volume while sales of A-B products overseas accounted for about 14.8% of volume. The balance of A-B's beer volume is made up from distribution deals in the U.S. and abroad. A-B has deals with InBev to sell Stella and Beck's in the U.S.; with Grupo Modelo, the Mexican brewery, to market Corona in the U.S.; and A-B has a stake in Chinese brewery Tsingtao.

A deal with A-B would not only give InBev better access to the U.S. market for its brands but also let it combine distribution and manufacturing to trim costs and get more products in the pipeline.

A-B operates 12 brewing plants around the country and makes its own packaging and labels through its Anheuser-Busch Packaging Group.

"When you're talking about the global beer market, it's flat. But there is a lot of growth potential by bringing more products here and getting A-B more distribution in the rest of the world," says Juli Niemann, an analyst at Smith Moore & Co. in St. Louis.


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