Heineken (HEINY)—the world’s third-largest brewer— made news over the weekend by rejecting a merger offer from rival SABMiller (SBMRY)—the world’s second-largest brewer. Apart from creating a global beer-brewing juggernaut, SABMiller’s offer was an attempt to fend off a potential bid by Anheuser-Busch InBev(BUD), the world’s largest brewer, according to Bloomberg.
I’ve got news for you: A mega beer merger isn’t happening.
Consider the trouble Anheuser-Busch InBev had in getting its 2013 acquisition of Mexican brewing groupGrupo Modelo approved. BUD had to sell its American distribution rights to Corona and Negra Modelo toConstellation Brands (STZ) in order to keep the regulators happy, but they didn’t get it right the first time. The U.S. Department of Justice initially torpedoed the deal on anti-competitive grounds.
If BUD had a hard time sealing the deal with Modelo—a medium-sized player at most among global brewers—then it’s hard to see the regulators allowing a merger between two of the big three. Anheuser-Busch InBev, SAB Miller, and Heineken have global market shares of 20.0%, 9.6% and 9.3%, respectively.
Drilling down into specific markets, the numbers get a lot bigger. Anheuser-Busch InBev reports market shares of 47.2% of the American market, 58.4% of the Mexican market and 56.0% of the Belgian market. Were BUD to make a serious offer for SABMiller, it would have to divest so much of the combined company as to make the deal unworkable.
Yet it appears that BUD’s interest is legitimate. What’s going on here, and why the sudden interest by Big Beer in getting even bigger?
In a word, “growth,” or the distinct lack of it in the developed world. U.S. beer sales fell 1.9% last year, even while craft beers enjoyed an impressive 17.2% pop.
Craft beers—which include everything from the larger independent brands like Boston Beer’s (SAM) Samuel Adams and the Spoetzl Brewery’s Shiner Bock (a favorite of mine)to the new upstart brewpub down the street—now account for 7.8% of all American beer sales, with no sign of slowing down. This is bad news for the likes of Bud, Miller and Coors, but it actually gets worse. Even the large, mainstream imports—which have been a major source of growth in recent decades—saw declining sales last year of nearly 1%. Americans are drinking less beer overall and being a lot more choosy about the beer they do drink.
It’s not just Americans who are sobering up; European beer sales have been disappointing for the better part of the past decade. Even Germany—the mecca for beer—is seeing declines in drinking. Germans have been drinking less beer every year for seven years running.
The one bright spot for Big Beer is its exposure to emerging markets and particularly to frontier markets like Africa. As I noted in “SABMiller: Right Now, the King of Stocks,” AB InBev gets about 52% of its earnings from Latin America, including Mexico. But its exposure to Africa is close to nil. Meanwhile, SABMiller’s African operations are responsible for 31% of profits, about 17% of which is from South Africa.
This is the real story behind all of the Big Beer merger talk: BUD’s management is salivating at the prospect of getting access to Africa’s up-and-coming consumers. African per capita GDP has more than doubled in the past decade, and according to Deloitte, seven of the 10 fastest-growing countries in the world are in Africa. As African living standards rise, so do the standards of African drinkers. But today, only about 20% of the beer consumed in Africa is branded or bottled. The remaining 80% is essentially glorified moonshine.
Is there a trade here?
Maybe. As I wrote in July, SABMiller is a stock worth buying on any pullbacks. The stock had a pullback in July and early August, dropping about 10% peak to trough. But the weekend’s merger talk sent shares sharply higher on Monday, to fresh 52-week highs.
At 28 times trailing earnings, SABMiller stock is pricey. Don’t buy at these levels. But if we get another pullback following a failed acquisition attempt by AB InBev, then I would recommend seizing the opportunity.
