Shares of beer companies gained momentum yesterday as a new wave of consolidation in brewing industry is being speculated across the market. As per this recent rumor, the world’s largest brewing company, Anheuser-Busch InBev SA/NV (BUD), aka AB InBev, is looking for finances to buy the world’s number 2 brewing company, SABMiller plc (SBMRY).
According to the sources of The Wall Street Journal, the first to report this revolutionary news, the companies have not indulged in any formal merger or acquisition discussions.
The recent development has moved the shares of some beer juggernauts’ higher. Yesterday, shares of SABMiller gained the most, registering an 8.5% rise. This was followed by 5.9%, 3.2% and 1.5% rise in the share prices of Molson Coors Brewing Company (TAP), AB InBev and Heineken NV (HEINY), respectively.
Prior to this, Bloomberg, on last Sunday, reported that SABMiller approached Heineken with a buyout offer which was rejected by the later. It is believed that the acquisition offer made by SABMiller was to defend itself from AB InBev’s takeover bid.
If SABMiller had succeeded in acquiring Heineken, its market share in the global beer industry would have increased to 18.9% from 9.6%. According to The Wall Street Journal, AB InBev being the world’s largest brewer has a global market share of 20.6% in the beer industry followed by SABMiller and Heineken with a 9.6% and 9.3% market share, respectively.
However, we believe that acquiring SABMiller will not be an easy task for AB InBev due to some antitrust regulations. We are also of the opinion that the acquisition will reduce competition and thereby hurt consumers as the company will have more power in terms of setting prices. Therefore, if the company decides to opt for this acquisition, the antitrust regulators may compel it to divest some of its brands.
We have noticed that the alcoholic beverage industry has been witnessing major consolidation in recent times. All the companies are taking utmost efforts to increase their share in this matured U.S. beer market and in Western Europe either through merger & acquisition or by expanding into new regions.
Some important acquisitions made in 2014 include the buyout of Beam Inc. in January by Japanese beverage company, Suntory Holdings Ltd., for a sum of $16 billion. Subsequently, AB InBev, in order to strengthen its position in the Asia-Pacific region, reacquired its South Korean asset – Oriental Brewery – for a sum of $5.8 billion from KKR and Affinity Equity Partners.
We expect the consolidation trend that has spread across the beer industry to continue as this will not only facilitate the companies in increasing their market share but will also help in reducing costs through leverage from suppliers and distributors.
Further, presence of large amounts of cash on corporate balance sheets, favorable credit markets, low interest rates, and strength in the stock market have also boosted confidence of the companies.
Moreover, looking at the share movement of both the buyer and seller companies, we believe that shareholders extend full support to big acquisitions so that the companies can beef up their market presence amid rampant consolidation.
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