THE BIG DEAL

Earlier this year, I told you about a financial analyst’s pipe dream involving the sale of immovable object, SABMiller, to irresistible force, AB InBev. Well, it now appears as if SABMiller isn’t quite is immovable as we might have thought. The speculation of a few Credit Suisse analysts has gone from a “theoretical” whisper to a “might-actually-happen” full-throated roar.

The $80 billion deal would be the biggest cash deal…well…ever. It would involve the largest corporation in a highly profitable industry purchasing the second largest corporation in said industry and gaining entry into new markets while controlling the lion’s share of production of an immensely popular commodity. It would create an absolute behemoth…an impossibly wealthy, impossibly influential, impossibly massive beer empire that could essentially do whatever it wants. So am I worried?

Not at all.

Before we get to the ramifications of this deal for our beloved craft beer industry, let’s discuss the nuts and bolts of the deal. Check out my earlier post on this story to get a sense of how AB InBev operates. If you don’t feel like making the effort to click on that link *, allow me to summarize:

*I know…your finger is tired from picking your nose/playing Gears of War 3/changing the channel in disgust after watching yet another Red Sox loss.

AB InBev is a corporation that lives and breathes mega-deals. InBev (sans Anheuser-Busch) was formed in 2004 during a gargantuan merger between Belgium’s Interbrew (which, in turn, was born when Belgium’s two largest breweries, Artois and Piedboeuf, merged in 1987) and Brazil’s AmBev (which itself was created when Brazil’s two largest breweries, Antarctica and Brahma, merged in 1999). Four years later, InBev, then the largest brewery on Earth, bought up Anheuser-Busch, the second largest. The trend is fairly obvious here…every few years, the brain-trust at AmBev/InBev/AB InBev decides that they’re bored and need to buy out their biggest competition. This should come as no surprise to anyone that follows the business world. The Brazilians who helm the company are consummate deal-makers and, by all accounts, are exceptionally talented at such acquisitions. The pay down debt quickly, wring out incredible cost savings, and put themselves into position for the next deal much more rapidly than industry experts predict. Furthermore, they’re an enormous public company that has, for the most part, saturated every market they’ve entered. With global beer sales flat, AB InBev needs to come up with SOME way to increase their shareholder’s earnings…and that means buying up the competition. This plan has worked wonders for them and it would certainly work again in this case.

There are a few hurdles that need to be cleared for this deal to come to pass. First is the matter of AB InBev’s debt. They still owe massive amounts of capital thanks to their acquisition of Anheuser-Busch. But, as noted, they’ve done a remarkable job of paying down that debt in just three short years. Carlos Brito, AB InBev’s CEO, has noted that this mega-deal won’t be possible until the company’s debt to EBITDA ratio falls below 2. For those of you whose eyes glaze over when you see financial jargon like that, “debt to EBITDA ratio” is a fairly common metric that basically divides a company’s incurred debt by its EBITDA which is “Earnings Before Interest, Taxes, Depreciation, and Amortization”. It’s a rough way of measuring when a company will be able to pay off its debt (or of determining the probability that a company will default on its debt).* AB InBev’s debt to EBITDA ratio fell from 3.7 to 2.9 last year and Brito believes it will drop below 2 sometime next year. When that happens, this deal becomes a distinct possibility.

*I knew that year working in capital management wasn’t a total waste!

There’s another issue at stake, and that’s a legal one. In most of the world, this deal wouldn’t be a problem…but in the US and China, the anti-trust lawyers are already sharpening their knives. If AB InBev bought SABMiller as it currently exists, the new super-company would own about 80% of the American beer industry. That falls squarely into the “monopoly” category and the US government isn’t keen on handing over any red, plastic hotels right now…particularly to a company headquartered overseas. The same is true in China where SABMiller owns a 49% stake in CR Snow, the largest brewery in the country. AB InBev already has a substantial presence in China and their control of CR Snow would be too much for Chinese authorities.

These two obstacles are eminently solvable, however. In the US, SABMiller and MolsonCoors (two former, bitter rivals) formed a joint venture called MillerCoors in 2007 in order to survive against the Anheuser-Busch marketing machine. That joint venture expires in 2013, and at that time, SABMiller could simply sell their domestic stake of Miller (and thus, their 30% control of the US market) to their current partners at MolsonCoors. So while SABMiller would still own the Miller brand elsewhere in the world, domestically Miller would become the first of the former “Big Three” to be swallowed up by one of its competitors. You’d still see Miller on the shelves, of course, but, in essence, the Big Three would now be a Big Two…Coors and Bud (aka MolsonCoors and AB InBev). By relinquishing control of the American market, SABMiller would eliminate the concerns of anti-trust lawyers. The same could easily happen in China where SABMiller would simply have to sell their shares of CR Snow. With those two smaller deals done, there would be no more hurdles in the way of AB InBev’s acquisition of its biggest rival.

Whew…you got all that? It’s complicated and, frankly, a little overwhelming. On the surface, it seems like THE biggest story in the beer world. I mean…Bud buying Miller?! And Miller giving up their American market to Coors?! That’s crazy-talk! But the truth is, this kind of stuff happens all the time (though admittedly not at this scale) when companies enter the world of international finance and never-ending M&A deals. You can’t think of those companies as “Bud, Miller, and Coors…All-American beer!” anymore. Now it’s AB InBev, SABMiller, and MolsonCoors…three monstrous corporate behemoths helmed in Brussels, London, and Montreal respectively. So if you ignore the “nostalgia” angle, you’ll realize that this is just business.

The bigger question, as far as the Aleheads are concerned, is what this means for craft beer. You might think the tiny Davids would be quaking in their boots at the thought of the evil AB InBev Goliath growing even fatter and richer. But pay close attention to this quote from the article:

“SABMiller is attractive to AB InBev due to the London-listed brewer’s large operations in the high-growth emerging markets of Africa, South America and eastern Europe which will help AB InBev reduce its reliance on the tough U.S. beer market.”

And why, do you suppose, the US beer market is so “tough” for AB InBev? Sure, beer consumption in general has declined a bit in the US, but not enough to explain why sales of Budweiser have dropped 30% in recent years. No, the blame/kudos goes squarely to the craft beer segment of the industry which has seen a meteoric rise even as overall beer sales have stagnated. With American craft growing by double digits every year, AB InBev is scrambling to come up with ways to compete against the little guys in a US market that provides over 90% of the company’s earnings. They’ve cut production/distribution deals with companies like RedHook and Kona and earlier this year they snapped up Goose Island lock, stock and barrel. The problem is that Aleheads everywhere have seen through these transparent ruses and have vowed to eschew former craft breweries that have the stench of AB InBev on them (I, for one, haven’t consumed a drop of Goose Island since the deal went through in March). In other words, those in-roads into the craft beer world may look good on paper for AB InBev, but they’re simply not going to make up for the losses that the company is facing.

The best way for AB InBev to counter their flagging sales in America is to grow their brand elsewhere. If they focus on parts of the world where craft beer isn’t a threat, they can presumably make up for their declining earnings in the US. Unfortunately, many of those markets are dominated by SABMiller brands so gaining a foothold in them could be exceedingly difficult. So what’s the largest, richest brewing corporation in the world to do? Oh right…buy SABMiller and take over those new markets the easy way. Since AB InBev likes making major deals almost as much as they like making tasteless, watery beer, that possibility seems to be closer and closer to coming to fruition.*

*Note: There’s one other little wrinkle to this story. SABMiller is finalizing a deal to purchase Foster’s, the Australian brewing giant, for $10 billion. This really shouldn’t slow down the deal by more than a few months, but it does make SABMiller a much more valuable company which means, presumably, that the deal would be quite a bit more expensive for AB InBev than it would have been had SABMiller remained Foster’s-free. Despite the potential price hike, it would give AB InBev a huge chunk of the Australian beer market, which presumably, actually makes SABMiller even MORE desirable**

**”Foster’s…it’s Australian for lipstick on a pig.”

If you look at it from this perspective, you realize that the AB InBev/SABMiller deal really isn’t about becoming an even larger company so as to crush the nascent craft beer industry. AB InBev is already large enough to swallow up every craft brewer in America if they really wanted to. The deal, to me at least, is more about AB InBev realizing that they CAN’T compete with craft beer here in the US. In my mind, you might as well consider the macros and the craft world to be two wholly separate industries at this point (and, if you ever conduct a head-to-head tasting between a Bud Light and a Bruery Rugbrød, it becomes pretty easy to think of those two products as apples and oranges). No matter what AB InBev does, the stigma of their products precludes them from gaining a foothold amongst craft drinkers. Even if they made a serious, concerted effort into brewing a legitimately tasty, all-malt product, Aleheads the world over would still ignore them. They simply can’t win at that game. So why bother? Instead, AB InBev is focusing on buying their chief competition in a segment of the industry that they understand better than anyone. A segment where marketing, PR, and brand recognition utterly trump the actual product being sold.

So no, I’m not worried. Yes, it’s a big deal in the brewing world. And yes, if this actually occurs in a few years, AB InBev will truly be the undisputed King of Beer. But I don’t see this as having any real bearing on the world of craft. AB InBev has always been the 600-pound gorilla in the industry. What difference does it make if they control SABMiller’s brands in the rest of the world? Hell, even if AB InBev bought up SABMiller in its entirety and DIDN’T have to relinquish SAB’s American market share, I’m not sure it would have any effect on craft. Beer drinkers today aren’t debating between Bud or Bell’s…Miller or Moylan’s. They’re either craft drinkers, or they’re not. It’s a binary beer world, and the AB InBev/SABMiller deal simply reduces controlling interests on one side of the equation.

Ah, but there may be ONE lasting consequence of this deal for Aleheads everywhere…and that’s a positive one. What happens when AB InBev devours its last, true competitor? What happens after they’ve bought up their largest competitor, paid down their debt, seen growth in some new markets…and then realized that their bottom line is stagnating once more? What happens when the company finally…FINALLY accepts that their failings in recent years aren’t because of high expenses or bad management, but because of producing an inferior product? Well, by then it will be too late. Craft beer will have become the dominant force in American brewing. We’ll have returned to the way it was before Prohibition, when there were hundreds upon hundreds of local and regional brewers making high-quality, all-malt brews. The endless variety, complexity, and innovation of the craft industry will be the law of the land and AB InBev will be on the outside looking in. It may take many years…decades in fact. But the seeds are being planted today.

With this deal, AB InBev will have conquered its rival. But when there are no more world’s left to conquer, what then? The unwieldy, cumbersome giant will have to rage against the upstart brewers who will continue to nibble away at the behemoth’s bottom line. Craft may not have AB InBev’s deep pockets or marketing clout, but they have an insurmountable edge in the one thing that actually matters…the beer.

It may seem counter-intuitive, and it may take a good, long while…but if this deal occurs…if this unprecedented victory for AB InBev actually comes to pass, it will eventually lead to something the company has never before faced.

Failure.

Go for it AB InBev. Grab that brass ring. And when you realize that there are no more rings left to grab, the rest of us will be sitting around the carousel, drinking our DIPAs and Saisons and watching you spin out of control and into oblivion.

You will not be missed.

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11 comments

  1. I share your optimism that this deal should have little effect on US craft drinkers and brewers, but I worry for those “emerging markets” like Africa and South America should Inbev gain such an absurd monopoly. What kind of legislation will they push for with their unimaginable political clout and resources to make sure craft brewing doesn’t catch on in those regions?

  2. “And when Alexander saw the breadth of his domain, he wept, for there were no more worlds to conquer. Benefits of a classical education.”

    – Hans Gruber

  3. I wonder how it will affect any distribution of non AB Inbev SABMiller beers.

  4. I also share that optimism, and don’t believe the actual merger, in and of itself, would be harmful to U.S. craft beer. The one thing that does concern me is the thought that after it acquires its big rival, Inbev will really have nowhere else to turn its eye in the aquisitions market besides more craft brewers.

    Undoubtedly, a number of them would sell out if offered the money, and that’s understandable. We’d all like to be millionaires. I wouldn’t relish, however, trying to navigate a craft beer landscape where I have to keep a big spreadsheet of which craft brewers are owned by Inbev and which are independent.

  5. Kid, no need to worry. Aleheads will always be here to maintain that spreadsheet for you.

    Charles, I wouldn’t think the deal would have much of an effect on distribution. Since MolsonCoors would retain ownership of SABMiller beers in the US, the distributors that are owned outright or monopolized by either AB or Miller wouldn’t change hands. Distribution in general needs a MAJOR overhaul in the US, but I don’t think this deal would have any particular negative consequences as far as craft is concerned. Perhaps someone with a little more knowledge of the current state of the three-tier system could expound a bit.

    Slouch, unfortunately, there’s not much of a craft beer industry in South American and Africa right now (although, I have received some correspondence from at least one Brazilian craft outfit called Seasons which has a flagship IPA called Green Cow). My guess is that the Big Three will duke it out in these new battlegrounds for a few decades until A) A local craft scene develops or B) American craft gets big enough to enter those markets and start chipping away like they’re doing here. I could certainly see some of the SoCal craft breweries entering markets in Mexico and slowly migrating South.

    Jaydles, where are my detonators?

  6. Interesting take. My Gloomy Gus personal fear is that the US hops market will then be cornered, or at least raise prices substantially, and thusly impact craft brewing. Yeah, there’s a whole lot more hops being raised today than 5 or 10 years ago, but what percentage of that yield is controlled by the big boyz ? And what happens if the harvest in a few years has problems (Global Warming anybody ?) and AB-zilla is able to buy up most of what does get produced ? I don’t see AB-zilla walking away from the US market without a fight.

  7. CZAR VLADIBEER S. BOOTIN' · ·

    “Mortimer, your brother is not well. We better call an ambulance.

    Fuck him! Now, you listen to me! I want trading reopened right now. Get those brokers back in here! Turn those machines back on!”

  8. I don’t think this deal will have much of an effect on the local hop market, Gus. First of all, since MolsonCoors will retain ownership of the Miller brands domestically, this deal wouldn’t really allow AB to “corner the market” so-to-speak.

    Second, AB actually already owns a large percentage of the hop fields they use with a fairly high chunk of them being overseas in Germany. Unless they somehow see an incredible jump in domestic sales over the next few years (unlikely, considered the trends), I doubt there will be an increase in the amount of US-grown hops they use. In fact, if they continue shifting focus on Light and Low-Carb beers as the trends would indicate, they could potentially use even FEWER hops in their beers since those brews have minimal hop profiles.

    Third, AB doesn’t use any of the high-alpha acid strains of hops that you’re finding in American craft beers right now. So the independent hop growers in the Pacific Northwest that are growing the “big” hops for the craft industry aren’t really in any danger of getting snapped up by AB. I suspect they make a much bigger profit selling in small volumes to craft brewers than they would make selling in bulk to AB,

    Finally, there’s a big push to ramp up hop production in the US right now…particularly in the upstate New York area. If a few more hop growing regions can come on-line in the next few years, the hop crises we run into every couple of years will hopefully be curtailed.

  9. Gus,

    Here was an interesting update on hop production in the US and Big Beer; A-B is buying less from domestic producers, relying instead on hop extract from crops grown overseas.

  10. That’s a lot of words in an article dedicated to speculation on what company will control X% of the worlds supply of fizzy piss. I can’t believe I read half of it.

  11. I get paid by the word.

    Seriously though, which half did you read? Because if it was the bottom half, you missed out on a great discussion about EBITDA. My recommendation would be to read from 3/10ths to the 8/10ths point if you can only read half. The only thing more nonsensical than my intros are my denouements.

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