Where to put Natty, Busch, and Michelob?

By Chase Kimball - June 28, 2012 | Tickers: BUD, SAM, BREW, HEINY, TAP | 0 Comments

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Although the rumors of AB InBev (NYSE: BUD) taking over Grupo Modelo are just that, rumors, the implications of such a transaction are causing visions of antitrust fairies to dance in our heads.  By buying the other 50% of Modelo (they already own a 50% non-controlling stake), AB InBev will crack the 20% mark of the global beer market by volume.  As of 2011, Modelo held 2.9% and AB InBev had 18.3% globally; but in the US, the combined entity could control more than half of the market (~53%).  With that kind of foothold, it is very likely the Justice Department will force some divestitures. 

As the June 25 issue of Wall Street Journal points out, 

"In a research note Monday, Bernstein Research said "it's very likely'' the Department of Justice "would object'' to the heightened beer-market concentration. It noted U.S. authorities in 2008 required InBev to dispose the Labatt beer brand, which had only a 0.7% market share, before allowing the Belgian brewer to buy Anheuser-Busch."  

So, it's safe to assume there will be at least some type of divestiture that will occur.  The real question will be if it is for the sake of true competition, or just to give the impression that the DoJ is on top of things.  The general consensus thinks possible targets could be Busch, Natural, or Michelob, mainly because AB InBev certainly wouldn't be asked to get rid of Bud or Bud Light and the only other brands with any real traction in the US are Beck's or Stella Artois, and these are far more popular in Europe.  So, of the three likely candidates, Busch, Natural, and Michelob (which together account for about 10% of US volume), where would they go? And who would really want to pay for more of a share in a declining beer market?

It would be pretty drastic to think someone like Craft Brewer's Alliance (NASDAQ: BREW) or Boston Beer (NYSE: SAM) would try to buy one of these names and re-position them to take advantage of the craft brewing boom, and neither of these companies could put the financing together to pull it off. 

One possible buyer could be MolsonCoors (NYSE: TAP), but with their recent $3.5 billion purchase of Starbev and new focus on emerging markets, this one would be a tough sell.  In this same vein, another interesting arrangement, and one that makes sense brand-wise, would be to send Busch, Michelob, and Natural to that great beer brand repository in the sky: Pabst Brewing.  The company holds the rights to such icons as Schlitz, Stroh, Lone Star, Old Milwaukee, Old Style, and of course Pabst Blue Ribbon.  While the SABMiller/MolsonCoors joint venture, MillerCoors, actually brews the beer, Pabst does all the marketing.  It wouldn't be entirely difficult to position any of the three AB InBev divestitures as hipster throwbacks, and a MillerCoors/Pabst bid could possibly raise the offer price AB InBev would get over a single name.  

So, is there anyone left?  I think another serious contender to swoop in a pick up any divestitures would be Heineken (NASDAQOTH: HEINY).  Although Natty and Busch are commonly found crumpled up on dorm room floors, and the ambition of Heineken USA is to become the "leading upscale (upscale=import+craft) beer company in the US," a possible strategy could be a re-branding.  If anyone has the marketing skills to take the "shame of Holland" (as a good Dutch friend once said) and turn it into an upscale beer in the US, it's Heineken.   

Last and final option is nothing happens.  The feds let a deal go through, and no one cries foul, although this is pretty unlikely based on precedent and the rules (for some bedtime reading) the DoJ applies to mergers with a monopoly smell.  Whatever does end up happening it will affect the US beer market for some time to come. 

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