This article was first posted to my old blog on 30/6/2008. I republish it here today, because it’s actual again with the news that InBev has to sell businesses to finance the Anheuser-Busch deal.
The Belgian beer giant Inbev has made an offer to buy Anheuser-Busch, the biggest beer brewer in the US, for $46 billion. (Which is, by the way, almost the same amount Microsoft offered for search engine Yahoo! earlier this year). Should the bid be successful, the new entity will be the world’s biggest beer brewer and London-based SABMiller will be pushed into second place.
On 23 June Handelsblatt, Germany’s biggest national daily business newspaper, published an interview with SABMiller boss Graham Mackay.
Here the interview as it appeared (translated by me):
Global size alone brings no benefits – Mackay
by Dirk Heilmann
The chairman of the board of the world’s biggest beer brewer SABMiller, reacts to the planned billion dollar deal between rivals Inbev and Anheuser-Busch and the special rules governing the beer market. In addition, Graham Mackay talks about his interest in German family breweries.
Handelsblatt: Your competitor Inbev wants to take over the US beer brewer Anheuser-Busch for $46 billion and wrestle the world leadership from you. What do you think about that?
Mackay: It will be very difficult for Inbev to obtain savings which justify the offered price. In the beer market, take-overs do not automatically bring strong synergies. The global beer brands are still in their baby shoes. That makes it very difficult to obtain synergies across borders. The Inbev/Anheuser-Busch deal will not bring many local synergies in individual markets. So, Inbev must think they will be able to run the Anheuser-Busch business more efficiently than the current management.
Handelsblatt: Why is that not possible?
Mackay: We have gained some experience with take-overs all over the world. With most of these take-overs we bargained we would be able to manage the businesses better than the managements had done up to that point. That was possible, for instance, when a company had been privatised shortly before, which enabled us to achieve much by bringing in a professional, experienced management. But, until just a few years ago, Anheuser was still known as the most competitive brewer in the world. One wonders how Inbev intends to reach such high savings, without damaging the business in the process.
Handelsblatt: So, you would not be interested to enter the fray with a counter-offer?
Mackay: It would be very difficult for us to intervene in such a deal – irrespective of the price. After all, we have a good business and established brand relations in the US.
Handelsblatt: Inbev might turn its attention to SAB, should its take-over attempt in the US fail. How would you react to that?
Mackay: There would have been markets in which we could have attained synergies, and others in which anti-trust intervention could have been expected. If Inbev were to cast a serious eye on us, it would have to be willing to pay a very high price. It would be extremely difficult for every bidder to convince our shareholders that it could manage our business better than we do. That may sound a bit smug, but I really believe it.
Handelsblatt: What would the take-over of Anheuser by Inbev mean to your young joint venture with Molson Coors, the second biggest beer brewer in the US?
Mackay: We most definitely do not tremble. Inbev will be very busy with the integration and the realisation of the promised savings. I can’t imagine that the cost reductions needed for that, will improve the competitiveness of Anheuser in the immediate future. Admittedly, Anheuser is 50% bigger than us in the US, but the momentum is on our side. We are in a strong position, and are moving in the right direction and that will not change in any way with this deal.
Handelsblatt: Until now, SAB’s involvement in the US has not been financially successful. Correct?
Mackay: It is true that our investment in Miller in 2002 has not yet returned its capital cost. But, that will quickly happen with the new joint venture. The Miller deal has, however, helped us in another way: It strengthened our profile and taught us a lot about mature markets. It has made us a global player. One of the reasons why the Miller deal has to date not returned the capital cost is the massive discounts handed out by Anheuser to brake our progress. That has worked, but has been very costly to them. In the recent past, it has been one of the causes of the position Anheuser finds itself in now.
Handelsblatt: Would it be a problem for you not to be the number one on the world beer market any longer?
Mackay: Presently, a number of estimates put us in the number one position measured by volume. But, I can’t say that I now feel any different from the time we were number two and three. What we want to produce, is growth and return. Global size on its own brings nothing in the beer market. One must also be able to take advantage of size. Within a particular country, size is very important. When you are the market leader in a country and operate efficiently, you usually make more money than the others.
Handelsblatt: So, the beer industry is not subject to the same consolidation logic as other sectors?
Mackay: That’s correct. In comparison to, for instance, spirits or cigarettes. Beer is a local business. It is attached to local brands and value-creation chains.
Handelsblatt: Why are there then so many international take-overs in the sector?
Mackay: Most recently, because of the fall of the Iron Curtain. In the wake thereof, there were many privatisations in Eastern Europe and elsewhere. That made it possible for us to make acquisitions in totally new markets. And we could really increase the values of these breweries with professional managements. That was not really a wave of consolidation. At the end of this phase, there are now big brewery concerns with aggressive managements, which believe in consolidation.
Handelsblatt: And this is not a game you have to participate in?
Mackay: I don’t think so. SAB Miller is a robust, global player. We don’t have to make any deals in response to Inbev. We will continue to look at everything coming onto the market. And the number of the opportunities coming to market might increase. Due to the high prices, many brewery owners might see this as the right moment to make money.
Handelsblatt: In this regard, do you also have German family businesses in your sight?
Mackay: Most certainly. Should an opportunity present itself to buy a bigger brand, then we would take a look at it. But, Germany is a special case. Here owners hang onto their breweries – which they have in many cases operated for generations already – especially tight. In Germany the development of national brands have proceeded very slowly. Here it is very difficult to consolidate and acquire market power. That’s why we have until now focussed on importing premium brands, such as Pilsner Urquell. We are relatively small, but are growing quite strongly – which is something the German market is not doing.
Handelsblatt: There is the general trend for traditional beer markets to stagnate, or shrink. Is it only possible for beer breweries to grow in emerging market countries?
Mackay: That is not a problem specific to beer. The same holds for toothpaste or washing powder. It is, therefore, the right strategy to move on the level of the premium brands. There we can continue on a growth path – even in mature markets with declining per capita consumptions.
Handelsblatt: Does this also hold true in times of business cycle downswings?
Mackay: The trend towards premium brands has practically no end. In good times it is really strong and in bad times somewhat weaker. Only very seldom the trend turns around in individual markets. But, more recently, the revival of the local markets has been another trend. That leads to a fragmentation of the premium segment.
Handelsblatt: How long can the strong growth in beer sales continue in the emerging market countries?
Mackay: The question is no longer whether growth will slow, but rather by how much it will slow. The commodities boom is not as strong now as it was just a few months ago and many emerging markets have inflation shocks to come to terms with. Interest rates have risen and consumer goods are under pressure. We continue to grow in these countries, but not as strongly as last year.
Handelsblatt: On commodities: How does SAB Miller handle the cost rises?
Mackay: We have increased prices quite substantially and have improved our productivity. This helped us to maintain our operative margin at 18 percent. I think, under the circumstances, it is a good performance.
Handelsblatt: Which commodity prices give you the biggest headache?
Mackay: The rise of commodity prices started out with the rise in energy prices, which drove our packaging costs up. That round was overtaken by agriculture products, such as barley, malt and hop, whose prices rose more than energy prices. Now another wave of energy price rises is upon us – and we spend about double as much on packaging as on agriculture products. We cannot say we have the worst behind us yet. I expect the oil price to rise further, but hope the prices of agriculture products will drop again soon.