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Cold gold. SABMiller story

SABMiller has been cheered as a darling of international sin stocks. Stephen Cranston traces how Graham Mackay turned a local brewery into a R400bn global empire
From its first brewery in Braamfontein, Johannesburg in 1895, SABMiller has become the most successful multinational company to originate from the African continent.

With sales of US$28bn last year and a fat operating margin of 17,8%, the SA- born brewer has come a long way from the days of gold-rush Johannesburg when Castle’s competition as the drink of choice was raw potato spirit mixed with tobacco juice and pepper.

Though the conglomerate has evolved over the years, CEO Graham Mackay has carried the local formula with him in going global. Now in 75 countries and with 200 brands, such as Peroni, Grolsch and Miller Lite, under its belt, SABMiller is a R400bn market cap global beer giant and the world’s number two after Anheuser-Busch Inbev. Almost 90% of its sales are outside its home market.

Mackay has been at the centre of this globalisation story. It has been 12 years since he moved the brewer’s Johannesburg headquarters to London and dual- listed it. But it is still South African at heart, as is most of his senior team .

An accomplished bridge player, Mackay is recognised by his peers and shareholders as a shrewd tactician. Last year he was chosen as European business leader of the year by a group of his peers at the CNBC awards.

“I have never met a CEO who impressed me so much with his strategic and tactical judgment,” says Sanlam portfolio manager Claude van Cuyck.

The only criticism of Mackay seems to be that he is a somewhat austere technocrat, a little bit too cool and unflappable. The contrast to his ebullient predecessor, Meyer Kahn, could not be more stark.

Says Kahn, now group chairman: “One of the things that marked out Graham for me is that he is so different from me. He was the best candidate for several reasons: he is 10 years younger , which was ideal in terms of succession planning .” Mackay also had a strong track record as head of the Beer Division (now SAB Ltd) . “And he is very thoughtful — he won’t reply to a question without serious consideration,” adds Kahn.

Mackay is an engineer in a business dominated by marketers and accountants. After university (he studied at Wits) he was brought into the diversified conglomerate BTR to help it choose a computer system for its polymer business. “Then in 1978 SAB approached me to revamp its computer systems, which were frankly in a shambles,” says Mackay.

That was the start of his rise to power at SAB, where after many management roles he was made heir apparent in 1994. At the time SAB was an old-style conglomerate which still owned substantial retail and industrial interests such as the Edgars clothing chain, OK supermarket, Plate Glass and Lion Match. Says Kahn: “People forget that conglomerates were in fashion in the 1970s and 1980s, and perhaps one day when I’m playing golf at the coast they’ll come back into fashion.”

Today, SABMiller is predominantly a beer and other beverage group . It’s a complex business, involving a merger with Coors in the US, cross-shareholdings with French-owned Castel in Africa, and soft-drink bottle agreements with Coca-Cola in Africa and Central America, plus a range of nonbeer drinks sold in different regions. This has been moulded by Mackay’s grasp of strategy — he has always been two steps ahead in the global beverage market.

In the 1980s, Mackay was part of the SAB management team which attempted to enter the US market under the radar through Rolling Rock beer. But it had to sell when sanctions were imposed. Kahn recalls: “Remember that we were locked in a bubble ... We were unable to move outside our borders.”

As a consolation prize, in 1990 it bought the main brewery in the Canary Islands, brewer of the locally popular Dorada and Tropical brands.

When sanctions ended and exchange controls started to relax in 1995, SAB was fortunate that there was extensive privatisation in Central and Eastern Europe. SAB was the first to buy into breweries in the Czech Republic, Hungary, Poland and Romania.

It managed to raise R2bn internationally, but it became apparent it would need to move its primary listing to London. “We are much more in the thick of things here in London, at the heart of the global investment community,” says Mackay, sitting at his offices in Stanhope Gate off Park Lane in London, where he spends probably only one week in the month in back-to-back meetings. The rest of the time he is out of the country.

“You have to be realistic about timetable pressure,” he has said in previous interviews with the media. “If you don’t push back occasionally, it would get on top of you.”

This philosophy has worked well for Mackay on his global acquisition trail. He ascribes his ambition to his upbringing. His father struggled to make a living as a farm manager in Swaziland, the then Natal and Rhodesia (now Zimbabwe).

So, Mackay built his empire on bold moves as the beer market consolidated: buying Miller in 2002, Peroni in 2003 and Grolsch in 2007, and merging Miller and Coors in 2008.

The acquisitions in Eastern Europe were the first test of the Mackay globalisation strategy: “There was considerable risk in turning around those state-owned businesses,” says Allan Gray chief investment officer Ian Liddle. “Those businesses were on their knees and unprofitable, but SAB could buy them at what were, with hindsight, very low prices.” Allan Gray is the largest institutional shareholder in SABMiller, the global entity.

SAB has met resistance as a foreign interloper, but Kahn says it has always worked hard on its corporate citizenship. Tony van Kralingen, who was deployed to run the Pils ner Urquell brewery in the Czech Republic, was even given the somewhat absurd but ancient privilege of the freedom of the city of Pilsen because he had turned their beer into a globally recognised brand .

But SAB had a depth of talented people who could bring the group’ s way of producing and marketing beer into the new countries. This loyal cadre was later deployed into North and South America. “None of us claims to be a genius at SAB,” says Kahn. “We are all just honest tryers but we all share a passion for our business, we have worked together for years and we genuinely work as a family.”

Mackay has echoed this in previous interviews: “We have a culture of solving problems as close as possible to the market, with high local accountability and self reliance. It’s a team thing.”

SABMiller likes to give its managers more autonomy, underpinned by Mackay’s willingness to travel constantly to assess the different businesses. The head office is populated primarily by accountants and corporate affairs staff.

Mackay’s key lieutenant over the past 12 years has been Malcolm Wyman, the chief financial officer. Wyman cut his teeth in mergers and acquisitions at UAL Merchant Bank (now Nedbank Capital) in Johannesburg. SAB was his client at the time until he was brought in-house. Wyman has since played a big role in SABMiller’s acquisitive growth strategy .

Mackay admits that the global consolidation of the beer industry is something of a curiosity, as there are limited financial advantages in combining beer businesses which have no geographical overlap. Beer is an intensely local business with brand loyalties.

There will probably never be a global beer brand with the reach of Coca-Cola — the Dutch beer Heineken is the closest, along with the ubiquitous Mexican beer Corona. But international brands account for only 6% of world beer volumes — and to reach a 50% share of world beer volumes the share of 60 big brands would have to be combined.

Says Kahn: “Breweries have been a seller’s market for decades. Family- owned businesses have built up dominant local brands which are never going to change hands at bargain prices.”

SABMiller now has breweries on every continent except Antarctica. And, while it might not have a plan to build a brewery for the seals and penguins there, Antarctica lager in Brazil is a brand it could buy from rival ABI one day .

The beer giant has often bought from families at far from bargain prices. But there were no awful deals along the lines of some of the businesses bought by, say, Old Mutual. Mackay was criticised for “overpaying” for just about every deal, but many of these were once in a lifetime deals, particularly as it is unlikely that rivals such as Anheuser-Busch Inbev or Heineken (the number three) will dispose of their best assets in a hurry.

“In most deals we assume that we can run the business better and faster to generate returns on invested capital. We take underperforming assets and use our expertise to raise returns,” says Mackay.

He adds that efforts to use resources more efficiently are perpetual — there is always more juice in the lemon. “Brewing has an unusually high level of capital and fixed costs so there is a high degree of profit sensitivity to sales volumes.”

Mackay has driven a business capability programme, a rather grand term for centralising some group functions, particularly global procurement and a regional manufacturing organisation in Europe. This has achieved $60m of savings and other benefits over the past year.

The company has walked away from deals which did not make sense. It had a share of the Chinese brewer Harbin, but when Anheuser-Busch offered a higher price it sold at a $200m profit. Last year it walked out of an auction with Heineken for Femsa, the Mexican brewer of Sol and Dos Equis.

The defining acquisition for SAB was that of Miller, the second-largest brewer in the US. It was so big, the group’s name changed to SABMiller.

The deal was not one which SAB had sought out. Philip Morris, the makers of Marlboro cigarettes, was refocusing on tobacco and did its own search for a buyer. Among other candidates was the British brewer Scottish & Newcastle. “They wanted to be paid in scrip and not in cash,” recalls Mackay. “I doubt that Philip Morris (now called Altria Group) would have been interested in taking the scrip from a JSE-listed business denominated in rand.”

Mackay says analysts have short memories: for the first three years after SAB moved its primary listing back to London in 1999 (it was listed in London up to 1950), analysts downgraded the share because of its exposure to emerging markets. If analysts are still lukewarm about the Miller deal, they cannot complain about the shareholder value ; the share price has grown from $6 to $36 over the past 10 years.

The Miller acquisition gave the business a wider investment base, and it was taken more seriously by US investors . The US remains the largest beer market (by value) in the world.

Before the acquisition, the Miller brand had lost market share. SAB managed to improve value when it deployed Norman Adami, who ran the Beer Division in SA, to the US. “My mandate was to stop the decline in sales and market share,” says Adami. “Miller had been highly innovative in the 1970s and with MillerLite pioneered the lower carbohydrate beer. But unfortunately Anheuser-Busch’s Bud Light overtook it and Miller’s image was not exciting.”

Miller’s other big brand, Miller High Life, was tarnished as the price had been discounted and it was considered a sub- premium brand.

Adami says key to a turnaround was to unify the distributors of the brand. Miller’s hand was strengthened by SAB widening its portfolio. Adami introduced the SABMiller global brands — Peroni, Pils ner Urquell and Grolsch — to the US and in turn took Miller Genuine Draft from the US to the rest of world. And Miller Chill, a lime-flavoured low-cal beer, was launched.

But the biggest event in the US, completed in July 2008 , was the merger of the Miller domestic business with the number three player, Coors, into MillerCoors, in which SABMiller holds a 58% share. By the end of 2012, the joint venture expects to bring $750m in annual synergies and cost savings.

Mackay says the joint venture has provided an excellent opportunity to rationalise and it could not have happened at a better time as it led to much improved profits at a time of market decline. Volumes are still soggy — they were down 3% in the year to March in the core business. But its specialist beers did well: sales of Blue Moon, which comes in flavours such as Honey Wheat, grew 25% and the Germanic Leinenkugel’s range by 8%. Mackay says the growth of craft beers in the US and Europe adds interest in the entire beer category, which can only be good.

But back home (its core market), SAB was facing new and stiff competition. It was no longer the sole supplier of beer. Adami was dispatched back two years ago to take on Brandhouse, the joint venture between Heineken, Diageo and Namibian Breweries — two of the largest drinks businesses in the world and the maker of Windhoek. Set up in 2004, Brandhouse opened a 4,5m hectolitre brewery at Sedibeng , south of Johannesburg, in March last year. (See story below.)

These were not the overambitious local businessmen — such as Louis Luyt and Anton Rupert — who had comp eted with SAB in the 1970s. “It was frustrating for me to see that two brands which we had built up in the SA market — Heineken and in particular Amstel — were now competing against us,” says Adami.

Without the SAB distribution behind it, Amstel is not the force it was, with market share falling from 9% to less than 5%. With intensive advertising Castle Lite has been repositioned as SAB’s main premium brand in SA, importing technology that makes the seal on the tin go blue when the drink is optimally cold.

But what’s SABMiller’s game plan to reach number one? Is Mackay scouting for new deals or will he chase volumes?

“We have the strongest global footprint in the brewing industry, with a highly attractive embedded growth profile and a good balance of earnings from a range of different geographies,” says Mackay. “We aren’t disadvantaged by our current scale, though we do continue to look at a mix of both greenfield and acquisition opportunities to move into new markets and beverage segments.”

SABMiller is seen as a good proxy for emerging markets — not even Unilever can boast SAB’s 75% of sales in emerging markets. Mackay says many emerging markets still have large informal or illicit alcohol segments, dominated by unbranded spirits or indigenous beers.

“Commercially produced beer is taking its share of alcohol because it’s affordable, high quality and aspirational owing to branding and advertising,” adds Mackay. “ We also see average consumption rates of beer well below international norms, with increases driven by rising wealth and disposable income.”

But he says life is tougher in more developed markets, where competition from wine and spirits is more intense. Building premium brands and innovating are the way to maintain market share and drive profit there.

SABMiller is now so big that there will always be some weak areas, but there are still some growth areas that can only be dreamt of in large developed markets. Volumes in Africa outside SA — in which Castle is the largest brand — were up 9%; there was 10% growth in Peru, 10% by volume in China — where its Snow brand is the largest brand in the world — and 10% in India.

Despite competition from Brandhouse in SA, and the incursions of Budweiser at the Fifa World Cup games, SA volumes also increased by 2%.

Mackay is now 61 and while there is no official retirement age at the group, he must be reaching his final few years as CEO. With Wyman’s imminent retirement, the shareholders would be uncomfortable if Mackay left too soon .

It is known that SABMiller has canvassed the possibility of Mackay succeeding Kahn (72) as executive chairman, with perhaps either head of Europe Alan Clark , Africa head Mark Bowman or Van Kralingen as MD . All are South African and schooled in the SAB Way. The golden thread continues.

The company has walked away from deals which did not make sense. It had a share of the Chinese brewer Harbin, but when Anheuser-Busch offered a higher price it sold at a $200m profit. Last year it walked out of an auction with Heineken for Femsa, the Mexican brewer of Sol and Dos Equis.

The defining acquisition for SAB was that of Miller, the second-largest brewer in the US. It was so big, the group’s name changed to SABMiller.

The deal was not one which SAB had sought out. Philip Morris, the makers of Marlboro cigarettes, was refocusing on tobacco and did its own search for a buyer. Among other candidates was the British brewer Scottish & Newcastle. “They wanted to be paid in scrip and not in cash,” recalls Mackay. “I doubt that Philip Morris (now called Altria Group) would have been interested in taking the scrip from a JSE-listed business denominated in rand.”

Mackay says analysts have short memories: for the first three years after SAB moved its primary listing back to London in 1999 (it was listed in London up to 1950), analysts downgraded the share because of its exposure to emerging markets. If analysts are still lukewarm about the Miller deal, they cannot complain about the shareholder value ; the share price has grown from $6 to $36 over the past 10 years.

The Miller acquisition gave the business a wider investment base, and it was taken more seriously by US investors . The US remains the largest beer market (by value) in the world.

Before the acquisition, the Miller brand had lost market share. SAB managed to improve value when it deployed Norman Adami, who ran the Beer Division in SA, to the US. “My mandate was to stop the decline in sales and market share,” says Adami. “Miller had been highly innovative in the 1970s and with MillerLite pioneered the lower carbohydrate beer. But unfortunately Anheuser-Busch’s Bud Light overtook it and Miller’s image was not exciting.”

Miller’s other big brand, Miller High Life, was tarnished as the price had been discounted and it was considered a sub- premium brand.

Adami says key to a turnaround was to unify the distributors of the brand. Miller’s hand was strengthened by SAB widening its portfolio. Adami introduced the SABMiller global brands — Peroni, Pils ner Urquell and Grolsch — to the US and in turn took Miller Genuine Draft from the US to the rest of world. And Miller Chill, a lime-flavoured low-cal beer, was launched.

But the biggest event in the US, completed in July 2008 , was the merger of the Miller domestic business with the number three player, Coors, into MillerCoors, in which SABMiller holds a 58% share. By the end of 2012, the joint venture expects to bring $750m in annual synergies and cost savings.

Mackay says the joint venture has provided an excellent opportunity to rationalise and it could not have happened at a better time as it led to much improved profits at a time of market decline. Volumes are still soggy — they were down 3% in the year to March in the core business. But its specialist beers did well: sales of Blue Moon, which comes in flavours such as Honey Wheat, grew 25% and the Germanic Leinenkugel’s range by 8%. Mackay says the growth of craft beers in the US and Europe adds interest in the entire beer category, which can only be good.

But back home (its core market), SAB was facing new and stiff competition. It was no longer the sole supplier of beer. Adami was dispatched back two years ago to take on Brandhouse, the joint venture between Heineken, Diageo and Namibian Breweries — two of the largest drinks businesses in the world and the maker of Windhoek. Set up in 2004, Brandhouse opened a 4,5m hectolitre brewery at Sedibeng , south of Johannesburg, in March last year. (See story below.)

These were not the overambitious local businessmen — such as Louis Luyt and Anton Rupert — who had comp eted with SAB in the 1970s. “It was frustrating for me to see that two brands which we had built up in the SA market — Heineken and in particular Amstel — were now competing against us,” says Adami.

Without the SAB distribution behind it, Amstel is not the force it was, with market share falling from 9% to less than 5%. With intensive advertising Castle Lite has been repositioned as SAB’s main premium brand in SA, importing technology that makes the seal on the tin go blue when the drink is optimally cold.

But what’s SABMiller’s game plan to reach number one? Is Mackay scouting for new deals or will he chase volumes?

“We have the strongest global footprint in the brewing industry, with a highly attractive embedded growth profile and a good balance of earnings from a range of different geographies,” says Mackay. “We aren’t disadvantaged by our current scale, though we do continue to look at a mix of both greenfield and acquisition opportunities to move into new markets and beverage segments.”

SABMiller is seen as a good proxy for emerging markets — not even Unilever can boast SAB’s 75% of sales in emerging markets. Mackay says many emerging markets still have large informal or illicit alcohol segments, dominated by unbranded spirits or indigenous beers.

“Commercially produced beer is taking its share of alcohol because it’s affordable, high quality and aspirational owing to branding and advertising,” adds Mackay. “ We also see average consumption rates of beer well below international norms, with increases driven by rising wealth and disposable income.”

But he says life is tougher in more developed markets, where competition from wine and spirits is more intense. Building premium brands and innovating are the way to maintain market share and drive profit there.

SABMiller is now so big that there will always be some weak areas, but there are still some growth areas that can only be dreamt of in large developed markets. Volumes in Africa outside SA — in which Castle is the largest brand — were up 9%; there was 10% growth in Peru, 10% by volume in China — where its Snow brand is the largest brand in the world — and 10% in India.

Despite competition from Brandhouse in SA, and the incursions of Budweiser at the Fifa World Cup games, SA volumes also increased by 2%.

Mackay is now 61 and while there is no official retirement age at the group, he must be reaching his final few years as CEO. With Wyman’s imminent retirement, the shareholders would be uncomfortable if Mackay left too soon .

It is known that SABMiller has canvassed the possibility of Mackay succeeding Kahn (72) as executive chairman, with perhaps either head of Europe Alan Clark , Africa head Mark Bowman or Van Kralingen as MD . All are South African and schooled in the SAB Way. The golden thread continues.

10 Jun. 2011

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