A Look at Breweries – Growth Through Acquisitions
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Profitability of breweries is largely dependent on the marketing, distribution and operational abilities of individual brewers as demand is driven by leisure activity more than anything else. This puts large companies at an advantage as they have benefits of economies of scale, leverage with distributors and effective and focused marketing techniques. No wonder then that we have seen and continue to see a lot of M&A activity in the brewing industry.
Demand for beer is getting sluggish in the developed world, but the stock market is upbeat with major players such as Diageo (NYSE: DEO), Anheuser-Busch InBev (NYSE: BUD) and SABMiller (NASDAQOTH: SBMRY) performing well with more than 25% appreciation in the last one year.
The brewing industry is comprised of companies involved in the production of beer, ale, malt liquor and non-alcoholic beer. Worldwide production of beer is in the range of 1.9 billion hectoliters with the U.S. accounting for 225 million hectoliters. The U.S. brewing industry has annual revenue of roughly $26 billion with 400 companies involved in the business of brewing. The two biggest brewers in the U.S. – Anheuser-Busch and MillerCoors (a joint venture of two UK based companies SABMiller and Molson Coors) – are parts of global brewing companies.
Researchers expect a modest growth in demand over the next two years. Recession and smoking ban in pubs are the two major reasons ascribed to fall in beer consumption. Major challenges are presented by imports and change in consumer preferences. Germany, for example, has been experiencing a gradual decline in the consumption of beer, considered to be the country’s national drink. In 2008, Germans drank 2.2 liters less beer than they did in 2007. The trend continued with German breweries selling 96.5 million hectoliters of beer in 2012, home and abroad, representing a decline of 1.8% year-on-year. This figure is the lowest since the unification of Germany in 1990.
There was a slight rise (2.6%) in the growth rate of the global beer market in 2011. However, this was mostly due to increased growth in emerging markets, which grew at 5%. In comparison, growth in the developed world, the U.S. and Europe, was restricted to 0.4%, mostly due to the crisis in the euro zone, slow recovery of the U.S. economy and consumers shifting to other alcoholic drinks. On the contrary, the healthier performance of emerging economies resulted in an increase in demand for beer.
Established in 1366, Anheuser-Busch InBev (AB InBev) is a Belgium company headquartered in Leuven. It is engaged in production, marketing and distribution of beer in North America, Latin America and Asia Pacific. Its portfolio of over 200 beer brands is divided into three major segments: global (Budweiser, Stella Artois and Beck’s), multi-country brands ( Leffe and Hoegaarden) and local brands (Bud Light, Michelob, Skol, Brahma, Antarctica, Quilmes, Jupiler, Hasseroder, Klinskoye, Sibirskaya Korona, Chernigivske, Harbin, and Sedrin.
Brands are also categorized into different categories: premium, mainstream or core brands, and value, discount or sub-premium brands. The company is also engaged in the business of soft drinks, carbonated as well as non-carbonated, in Latin America through its subsidiary AmBev and in the United States through Anheuser-Busch. Its soft drinks business includes in-house productions as well as brands owned by PepsiCo, with which it has a long term agreement to bottle, sell and distribute its brands.
BUD has a market cap of $148.33 billion and enterprise value of $185.25 billion. With a healthy operating margin of 31.82%, the company has an EPS of $4.55 per share and a dividend yield of 1.68%. Its revenue for the year ended December 2011 was $39 billion, an increase of almost $3 billion from the prior year.
In June last year, there were reports that AB inBev was contemplating buying the 50% share in Modelo that it did not own. The deal, if it had gone through, meant coming together of the biggest brewer in the U.S. and the biggest brewer in Mexico.
AB InBev was forced to change the terms of its $20.1 billion takeover of Mexico’s Groupo Modelo after the US antitrust agency blocked the deal claiming that it was tantamount to stifling competition by removing an independent competitor, which would lead to higher prices. AB InBev has now modified the $20.1 billion deal and agreed to sell Piedras Negras brewery in Mexico, owned by Modelo, to Constellation and grant it perpetual rights for Modelo brands in the United States, at a cost of $2.9 billion.
Constellation Brands (NYSE: STZ), a wine company and a marketer of imported beer in the US is linked with BUD in a complex manner. Constellation has an investment in Crown Imports LLC, which in turn is a joint venture with Grupo Modelo, S.A.B. de C.V. (Modelo) through which Modelo brands are imported and sold in the US. Anheuser-Busch owns 50% of Modelo.
Valuation wise, Diageo is a much smaller company as compared to the beer giant AB InBev. However, despite having a comparable operating margin (30.54%), it has higher EPS of $6.24 and also a higher dividend yield of 2.39%. Diageo posted a steady growth of 5% in sales in the six months ended December 2012 and an earnings growth of 9%.
Diageo is engaged in production, distilling and brewing of spirits, beer, wine and ready to drink beverages. The company’s core business however is in spirits rather than beer. The company has presence across the globe selling brands that include Johnnie Walker whiskey and Guinness beer and other regular and premium scotch whiskeys, vodka, rum, gin, liqueur and tequila. Established in 1886, the company is based in London.
Diageo has been involved in quite a few acquisitions in recent years. In 2011, it completed the transaction of acquiring a 50% controlling stake in Rum Creations Products and an additional 4% stake in Sichuan Chengdu Quanxing Group Company. Later, in the same year, it acquired 20% interest in SABMiller Africa BV and 49% in Carlos Palanca Group's 49% non-controlling equity stake in Diageo Philippines. The company’s 2012 acquisitions include 100% equity of Ypioca Bebidas S.A., Meta Abo Brewery Share Company SC and Cabin Fever Maple Flavored Whisky.
The company is currently involved in the process of acquiring majority stake in United Spirits Ltd (USL), an Indian company. The fair-trade regulator is expected to give its final clearance to the nearly $2 billion deal following the conditional approval. Earlier, the Securities and Exchange Board of India (SEBI) had cleared an open offer by Diageo for purchasing 26% stake in USL.
SABMiller is a holding company with interests in brewing and beverages across the globe. It has more than 200 brands of beer in its portfolio and is also a bottler for Coca-Cola. Like Diageo and Ab InBEv, SabMiller too has been making acquisitions. The company’s acquisitions in 2011-2012 include:
- 27.5% interest in BIH Brasseries International Holding (Angola) Ltd
- remaining 50% share in Pacific Beverages Pty Ltd
- 33% interest in International Breweries
- Additional 2.9% interest in Tanzania Breweries Ltd
- 100% interest in Foster’s Group Ltd
SABMiller is now looking to consolidate its position in the Chinese beer market with the acquisition of Kingway Breweries, which controls seven breweries, four of which are in the fastest growing region of Guangdong province on the South China Sea coast.
The company has a relatively lower operating margin of 24.43%, diluted trailing twelve month EPS of 2.76. Year-on-year, the company posted quarterly earnings growth of 15.10%.
It is not clear whether the strategy of growing by acquiring multi-national and regional companies in the industry stems from fears of a fall in beer consumption or simply an effort on the part of cash rich companies to expand horizontally. Whatever be the reason, it is a strategy that is working very well.
Despite reports of a fall in beer consumption in the developed world, the global players in the brewing industry have developed an interesting growth strategy by buying brewing interests in emerging markets. Companies like Diageo stand to benefit in the developed world due to the shift seen in consumer preference towards spirits. On the other side, beer majors, AB InBev and SABMIller, are going all out to cash in the growing demand for beer in the emerging markets.
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