Beer takeover agreement is brewing in the background

21 September 2014 - 02:31 By ADELE SHEVEL
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NO THANKS: Heineken is not ready to change owners yet
NO THANKS: Heineken is not ready to change owners yet

THE top three brewers are circling each other after Heineken's rejection of SABMiller's takeover attempt sparked speculation about a long-awaited AB InBev bid for the South African turned global brewer.

THE top three brewers are circling each other after Heineken's rejection of SABMiller's takeover attempt sparked speculation about a long-awaited AB InBev bid for the South African turned global brewer.

Perhaps this is just the outcome that SABMiller wanted.

"They possibly went in with the view that if this doesn't catalyse them [AB InBev] into action, nothing will," said Absa Wealth & Investment Management's Chris Gilmour.

He thinks it is unlikely that SAB's bid for Heineken was a casual pursuit but rather part of a well-strategised plan.

"I don't think it was hatched over a couple of beers at 65 Park Avenue... both [the late] Graham Mackay [previous head of SABMiller] and Alan Clark are very cerebral. The question is: do they want to get bought out or do they want to avoid being bought out?"

Looming ructions in the sector are a reflection of flagging beer sales in traditional markets. Sales growth in the $651-billion global industry has slowed to only 1.3% a year since 2004, according to a report from Bloomberg Intelligence. But there are better prospects in emerging markets where demand is rising faster than elsewhere.

Global brewers are expanding to control markets in Africa and China, where a growing middle class is switching from local brews to brands.

Heineken is the world's third-largest beer producer with 8.8% of the world's beer production. The Dutch brewing group operates in more than 70 countries, and sells more than 170 beers. The world's second-largest brewer, SABMiller, accounts for 9.7% of world production. It has more than 150 brands, including Carling Black Label, Castle, Peroni and Miller Lite in 75 countries.

Top of the pile is AB InBev. Based in Belgium and maker of 18.1% of world beer, it has more than 200 brands with Budweiser and Stella Artois, and is by far the most profitable brewer in the top tier.

But if any beer group is doing well in developing markets it is SABMiller, and AB InBev wants what it has got. On the other hand, SABMiller, which has acquired smaller businesses, wants the iconic Heineken, possibly to beef up its scale and protect itself from becoming a takeover target itself.

But the prospect of a tie-up with Heineken is slim. Senior analyst at Bernstein Research, Trevor Stirling, said: "The Heineken family much prefers having complete control than being the second-largest shareholder in a much larger entity, not to speak to the very strong emotional and governance links they still have with the company and the brand."

Given the nature of this leak, and the current strong operational momentum at Heineken, "we think it highly unlikely that the two sides will be sitting round a table any time soon".

There is also the matter of bad blood between the two.

Less than two decades ago, SAB and Heineken were close allies - SAB brewed and distributed Amstel under licence in South Africa. Then SAB went global, buying Miller Brewing in the US, which Heineken wanted.

A few years later, it snapped up Bavaria from under Heineken's nose. In retaliation, the Dutch brewer nullified agreements related to Amstel.

The prospect of AB InBev pursuing SABMiller, which has been speculated on for years, is more likely now that AB InBev is talking to banks about financing a possible $122-billion takeover bid, according to the Wall Street Journal.

There would be antitrust implications should a deal between the two take place - in the US and China - but analysts suggest this could be taken care of through disposals.

There other ways this could play out. The share prices of both Carlsberg and Diageo rose this week on speculation that they could be alternative targets for SABMiller.

But Morningstar's Phillip Gorham said Carlsberg's brands were less appealing, and its biggest developing market was Eastern Europe, which was not growing as quickly as other developing regions.

A research note from Barclays said Diageo and SABMiller could merge or SAB could buy Diageo's beer business.

Then again, SABMiller could buy Groupe Castel's African beer operations, in which it already has a 20% stake.

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