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Big beer merger excites investors, not analysts

Rumors fly over $80 billion deal to join A-B InBev and SABMiller, but it would amount to an about-face in brewer's strategy.
As some of the season's last baseball games play out in stadiums named Busch and Miller, Wall Street is buzzing about a different kind of match between the two beer brands.

For the past couple of weeks, rumors have been swirling about a possible combination of the world's No. 1 and No. 2 brewers, Anheuser-Busch InBev and SABMiller. The merger speculation has popped up before, and the latest gossip doesn't add anything new except a potential price tag: $80 billion.

Still, investors seem to want the rumors to be true. SABMiller shares jumped 7 percent in London trading on Oct. 6, the day a Brazilian website published a report about the potential deal.

The rumors seem plausible for several reasons. Anheuser-Busch InBev's biggest shareholders came from the investment banking business, and they have built the world's largest brewer through a series of opportunistic mergers. It has been three years since they bought St. Louis-based Anheuser-Busch, so perhaps they're hungry for another deal.

Then there are the savings to be had. Mike Gibbs, an analyst at JPMorgan, estimates that the sharp-penciled folks at A-B InBev could squeeze $1.3 billion out of the combined companies' cost structure.

Plus, beer sales have been stagnant in the U.S. and Europe, where A-B InBev does the bulk of its business. Why not buy some growth, along with exposure to Africa, where SABMiller has a leading position?

A deal would face significant hurdles, starting with the U.S. Justice Department. A-B InBev and MillerCoors (a joint venture that is majority-owned by SABMiller) sell more than three-quarters of all beer consumed in this country.

Analysts presume that MolsonCoors, the other joint venture partner, could buy all of MillerCoors. But agreeing on a price might be difficult, and Gibbs says MolsonCoors might have difficulty financing its part of the deal. The joint venture agreement bars either party from selling before December 2012.

China also would probably raise antitrust concerns, analysts say.

For A-B InBev, a mega-acquisition would represent a sudden about-face in strategy. It has paid down nearly half of its debt load from the Anheuser-Busch acquisition, and management has been "vocal about focusing on organic growth," says Gimme Credit analyst Dave Novosel.

"It's highly unlikely, in my opinion, that this deal goes through," Novosel said.

Tom Pirko, managing director of consulting firm Bevmark, is also skeptical about the deal rumors.

The companies' cultures are very different, and Pirko says he thinks A-B InBev would have difficulty imposing its tough-on-costs culture on SABMiller. "It's a Latin American mentality versus a South African mentality, and those two wouldn't mix very well," he says.

Pirko thinks Wall Street may be a little too eager to see a big merger and the big fees that go with it. He doesn't deny, though, that the beer industry is in a consolidation phase. "One thing the analysts have right is there's a tremendous drive right now, like a sex drive, for consolidation and mergers," Pirko said.

Combining the two industry giants, though, might be a merger too far. "I can pencil this out and come up with the same valuation numbers," Pirko said, "but it's a deal I would have great trepidation about. I'm not sure the synergies are as easily available as some people think.

"Coke and Pepsi shouldn't merge, and these companies should think of themselves as the Coke and Pepsi of the beer business," Pirko adds. "It's about beating your competition, but also about being sharpened by them. The more you compete against each other, the stronger you both become."

17 Oct. 2011

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