Brewer mega deal will ripple across consumer sectors

NEW YORK • Anheuser-Busch InBev's (AB InBev) prospective deal for SABMiller is expected to ripple across other consumer industries in the next few years, from soda makers and bottlers to snack manufacturers.

If AB InBev's initial approach to SABMiller succeeds, the resulting brewer, with a US$275 billion (S$385 billion) market capitalisation, could eventually buy Coca- Cola or PepsiCo, analysts said.

That would break down longstanding US barriers between the manufacture and sale of alcohol and soft drinks. AB InBev is backed by private equity firm 3G Capital, known for a relentless focus on trimming corporate fat.

Coke or Pepsi could represent a fresh source of corporate bloat for 3G and its Brazilian stewards to target, while also opening up opportunities to combine distribution channels, analysts said.

More consolidation within the packaged goods industry is already expected following the July merger of Kraft Foods Group and ketchup-maker H.J. Heinz, backed by billionaire Warren Buffett's Berkshire Hathaway and 3G.

While Coca-Cola, with a market value of US$171 billion, is too big for AB InBev to buy, an integrated combination of AB InBev and SABMiller could be well positioned to acquire Coke in three to four years, an industry banker said.

Coca-Cola's size would become less of a hurdle to a potential deal over time, analysts said.

Mr Ali Dibadj, an analyst at Sanford Bernstein, said: "Because companies are getting bigger with this potential acquisition, they're allowed to dream even bigger."

In a research note, he said the merged entity could buy PepsiCo's beverage business, with Kraft- Heinz potentially buying PepsiCo's Frito-Lay snacks business.

Such possibilities could put pressure on the soft-drink makers, already struggling with dwindling demand for traditional soft drinks, to cut costs and increase sales, or risk getting acquired. Coke and Pepsi declined to comment.

UBS analyst Stephen Powers said: "Should a (beer) deal ultimately be successful, the pace of consolidation that it symbolises across the broader industry might pressure Coca-Cola and PepsiCo to accelerate their own focus on delivering increasing top-line growth and cash productivity."

While Coke has historically been averse to combining soda and beer because of a belief that they address separate markets, companies elsewhere in the world, such as Japan's Suntory Holdings, sell both categories.

In the immediate term, the AB InBev potential buyout of SABMiller may force soda companies to decide what happens with their bottling and distribution agreements with the two beer companies in international markets.

SABMiller handles bottling operations for Coke in seven markets, including El Salvador. In November last year, the companies agreed to combine bottling operations of their non-alcoholic, ready-to-drink beverage businesses in Southern and East Africa.

Meanwhile, AB InBev has distribution agreements with PepsiCo in Latin America, including the exclusive right to bottle, sell and distribute certain Pepsi brands in Brazil.

Analysts said it is unlikely that the combined entity would bottle both Coke and Pepsi products.

They are competitors, Mr Dibadj said, adding that "sharing of information, analysis and people across the bottlers isn't typically supported by Coke and Pepsi".

A beer merger would provide opportunity for Molson Coors Brewing Company to gain increased exposure to the US market.

Anti-trust regulators are widely expected to oblige the new colossus to divest its stake in MillerCoors, the joint venture created by Molson Coors and SABMiller, to dilute what would otherwise be a 70 per cent market share in the US.

As stipulated by their joint venture agreement, Molson Coors has right of first and final refusal to acquire SABMiller's holding. Market estimates value the remaining stake at about US$7.4 billion.


A version of this article appeared in the print edition of The Straits Times on September 21, 2015, with the headline 'Brewer mega deal will ripple across consumer sectors'. Print Edition | Subscribe