As a lifelong Red Sox fan, my favorite time of year for decades was the Hot Stove season. Until the Red Sox began focusing on pitching (and spending money like it was water), there was really no reason to believe they had much of a shot at winning the World Series once the season began. But during those Winter months, when impractical trades were tossed around like confetti and every player was expected to have a breakout season…THAT was often the highlight of the year for a Sox fan. Because of those futile years of pining, I’ve learned to appreciate and love the fine art of speculation.
We see it all the time these days. We begin speculating as to who the favorites will be in next year’s Superbowl BEFORE this year’s game is even finished. We talk about who the Presidential candidates will be years before the election. But no industry thrives on speculation as predominantly as the financial sector. It’s an industry inherently built on hypothesizing. And the best speculators are well-compensated for their predictive abilities.
Aleheads is not a business blog or an investment blog or even a blog staffed by writers who are particularly good at making money (or doing anything, really). As such, we generally steer clear of reading or writing about stories related to the big, bad world of finance. But anyone who has kept their eye on the beer blogosphere over the past few weeks noticed a juicy, massive story that came straight from Wall Street. In a nutshell, Budweiser is buying Miller!
OK…I made that up entirely. Neither company has even hinted at this potential deal. There have been no comments made by either brewery and no sign that such an event will even remotely come to pass. It’s a completely fictional scenario dreamed up by some financial analysts working for Credit Suisse. But regardless of how tenuous a grip this story may have on reality, it’s worth exploring. So let’s!
The logic behind the speculation stems from the idea that the company that owns the Budweiser brand seems to exist solely to create mergers. Let’s look at the timeline:
- 1987: The two largest breweries in Belgium, Artois and Piedbouef, merge, forming a company called Interbrew.
- 1999: The two largest breweries in Brazil, Antarctica and Brahma, merge, forming a company called AmBev.
- 2004: Interbrew and AmBev merge, forming the largest brewing corporation in the world, called InBev.
- 2008: InBev, the largest brewer in the world, merges with the second largest brewer in the world, Anheuser-Busch, to form Anheuser-Busch InBev.
Do you see a pattern here? Every few years, the Brazilian brain-trust at AmBev/InBev/AB InBev seem to get an itch to purchase the largest brewery available. Maybe it’s just because they’re aggressive businessmen who love the art of the deal. But, as the Credit Suisse analysts discuss, it’s probably a lot more mundane than that. AB InBev is a public company and the shareholders expect to see growth. But how much can you really grow when you’re far and away the largest brewer in the world and you’ve essentially saturated every market you compete in? The Brazilians discovered the best way to do this was to keep buying off their biggest competition. They would wring out cost savings during the deal and pay down debt as quickly as possible. The shareholders would reap the rewards and everyone was happy (other than people who like good beer).
The purchase of Anheuser-Busch led to billions in cost-savings for InBev. And by all accounts, they have done a remarkable job paying off their debt. The problem is…what’s next? There’s not a lot of organic growth on the table for AB InBev. They’re about as big as they can get in most markets and they’re not nimble enough to make inroads into markets they don’t already dominate. The only option available to increase stock prices is to snap up another competitor. But who’s left?
The second largest brewer on Earth is SABMiller. In 1999, SAB (South African Breweries…a London-based outfit) purchased Miller and changed their name to SABMiller. The company, which produces such dreck as MGD, Grolsch, Peroni, and Pilsner Urquell is AB InBev’s biggest competitor by far. But, oddly enough, the two companies don’t overlap in too many global markets other than the birthplace of Miller and Anheuser-Busch’s trademark watery adjunct lagers…the good ol’ USA. So it does make a lot of sense for the companies to merge since it would allow AB InBev to take advantage of the different markets that SABMiller dominates. Ah, but there’s a catch…AB InBev and SABMiller own 80% of the beer market in the US. If the two companies attempted to merge…well…let’s just say the anti-monopoly lawyers in this country would be sharpening their knives.
So that’s the end of the speculation, right?
Not so fast.
You see, in 2007, SABMiller and MolsonCoors entered into a joint venture to compete with Anheuser-Busch in the US. In the bad old days, Miller, Coors, and Anheuser-Busch were the big three. They dominated the US beer landscape and fought for market share. But, thanks to brilliant marketing and aggressive tactics, Anheuser-Busch won the day and slowly began taking over more and more market share from Miller and Coors. After Coors was bought out by Canadian-based Molson and Miller by SAB, the two companies decided to combine their US operations to better combat the unrelenting forces of Anheuser-Busch. Everywhere else in the world, SABMiller and MolsonCoors are competitors. But in the US, their joint venture, called MillerCoors, essentially makes them the same company.
What does that all mean for the potential AB InBev/SABMiller merger? Simple. In 2013, SABMiller is allowed to sell off their stake in MillerCoors. If they sold to their joint venture partner, MolsonCoors, they would no longer have any brewing operations in the United States.* Without an American presence, SABMiller could be purchased by AB InBev without any anti-monopoly concerns. In other words, the mega-deal really COULD work.
*That might actually be the most amazing part of the story. Even though the Miller brand would assumedly still be sold by MolsonCoors in the US, SABMiller would no longer own the brand in America. In other words, Miller as a company would basically cease to exist in the US.
Why am I writing about this story…particularly when there’s no indication it will actually come to pass? For starters, I wanted to understand it better myself. Once I researched the details, I thought it was interesting enough to share with our readers. But there’s another reason that Slouch and I have been talking about in our recent All Beers Considered podcasts…this potential merger reveals how untenable the future of “Big Beer” is…at least in the US.
For all of AB InBev and SABMiller’s successes in the rest of the world, the US is still the biggest and most important beer-swilling country on Earth. And with the ongoing craft beer revolution that the Aleheads talk about on an almost daily basis, Big Beer is slowly losing ground in the US. Americans are developing a taste for beer with taste. And that’s bad news for the makers of Bud and Miller products. With market share declining in the US and the rest of the world essentially split up between the two companies like a game of Risk, all AB InBev and SABMiller can really do to increase profits is merge. They can’t compete with American craft brewers because their products are inferior and because they have been vilified (for good reason) in the minds of craft beer drinkers. Even if they began churning out a good product, there is a such a stigma attached to their companies’ names that no self-respecting Alehead would be caught dead with their brews.
So all that’s left to make shareholders happy is for the two largest breweries to combine. But what then? When there are no worlds left to conquer, and tiny craft breweries are continuing to eat away at their profits, what can the gigantic Anheuser-Busch/InBev/SAB/Miller corporation do? The answer? Not much. The beast can rage against the dying of the light all it wants, but in the end, Big Beer has simply gotten too big to survive. The Brazilian dealmakers are a few miles away from the sun, and their wax wings are starting to melt.
Are we really witnessing the beginning of a long and painful downfall for Big Beer? God, I hope so. When you put profit, marketing, deal-making, mergers, stock prices, and billion-dollar acquisitions above the actual quality of your product you’re doomed, eventually, to fail.
So I hope this merger DOES happen. I hope AB InBev buys out SABMiller and the MillerCoors joint venture breaks up. I hope the merger gives the newly formed company a ton of cost-savings and makes their shareholders happy for a time. And then I hope they realize that they’re finished. That there is nowhere to go but down. That by selling their soul in the name of profit, they are edging closer and closer to their own demise.
And we’ve got a front-row seat for the battle. We get to watch the knights of the craft beer movement slay the beast. It will be epic. And it will be bloody. And there will, of course, be some casualties amongst our heroes as the beast lashes out against them. But in the end, we will be victorious.
Of course, that’s all just speculation.