Global hop marketA local alternative to mass beer suggested by independent brewers has been successful and is now altering the global market. Beer is becoming more diversified, so transnational companies have to accept the new game rules and to switch focus to young and fast growing markets. All these processes increased the demand for aroma and bitter hop as well as their acreage expansion on two continents. However now there appeared a downward trend of alcohol consumption in the world, so even special sorts can soon turn to be sufficient. In this connection the dynamic American hop market is already facing some problems. EU hop producers have become more cautious, they are not racing to exceed the demand and look forward with more confidence, judging by the contract terms.
Hop Market in RussiaGermany still dominates the Russian market, yet over the recent two years one has been able observe a continuous success of Czech hop suppliers. Their expansion and growing popularity of hops from the United States became the drivers of supplies growth in 2016 despite the preceding modest harvest crop in the EU, as well as the factor of relative stability in 2017. In this connection, in 2017, the ratio of the varieties continued to shift towards the aroma ones, and the supplies of Magnum hop and other alpha varieties were reduced. However, the import of bitter hop pellets is partially replaced by extracts, especially from the major beer manufacturers. Total volumes of alpha acid supplies, according to our estimation, decreased by approximately 5% and returned to the level of 2015. Barth Haas Group continues dominating the hop products market; HVG also increased its weight. At the same time, Morris Hanbury significantly reduced the supplies in 2017.
10+1 trends of Russian beer market 2015-2017Despite of the moderately negative prognoses for 2017, the beer market can be stabilized soon. Yet the years of the negative dynamics have resulted in marketing being limited just to “optimization” and the art of balancing between price and volumes. Bigger supermarkets share means stronger trade marketing. These processes are connected to the majority of the described trends. At the same time, the federal brands inflation leads to searching for new tastes, sales channels and contact formats that expand the product range and diversify the beer market, but do not imply a substantial volume increase. Let us enumerate and further discuss the ten trends of the beer market we can see in 2015-2017 as well as the major event of 2017.
Beer market of Ukraine 2017In the first half of 2017, the Ukrainian beer market goes on decreasing slowly. Yet, the companies manage to compensate their lost volumes by raising prices and improving the sales structures. This results in the mid price market segment reduction while the sales of premium brands are rising. These processes are connected to position strengthening of companies Carlsberg Group and Oasis and the market share reduction of Obolon. Most of the novelties by the market leaders belong to craft or hard lemon categories.
Beer market of Russia 2016: PET goes to draftThe beer market of Russia was warmed up by the hot summer, but the preparation for large volume PET prohibition has already impacted it negatively. The year was successful for Efes, MBC and regional producers; Carlsberg’s positions were virtually stable but AB InBev and Heineken lost a part of market share having focused on the sales profitability. The dynamics of big brands was determined by how much the companies were willing to keep the prices down or by their promotional activity. In this context the economy segment of the beer market and sales of inexpensive draft beer were increasing. The premium segment started shrinking due to license brands migrating to the mainstream segment.
SABMiller and InBev: The dance of the elephants
The world’s brewers have been consolidating at a phenomenal rate in the past ten to fifteen years, to the extent that only a small handful of them control the majority of beer brewed in the world today. The top four-ABI, SABMiller, Heineken and Carlsberg-collectively accounted for 49.9% of total global beer production in 2010.
But the very large deals, such as SAB’s acquisitions of Miller in 2002 and Bavaria in 2006 and Interbrew’s merger with Ambev in 2003 which formed InBev and Inbev’s acquisition of Anheuser-Busch in 2008 are largely a thing of the past. This is so because there are no medium to large brewers left to acquire, which leaves just the three global brewing giants-ABI, Heineken and SABMiller-dancing with themselves. Fosters of Australia, recently bought by SABMiller for $10bn, is only ranked number 30 in the global beer volume league.
So it is becoming increasingly difficult for the beer behemoths to make any appreciable difference to performance by acquisition - other than by making audacious acquisitions, such as that envisaged in an ABI/SABMiller deal.
Talks between SABMiller and ABI or its predecessor are not new; in 2007 the two groups held talks with a view to merging (this was before the acquisition of Anheuser-Busch by InBev when Inbev was appreciably smaller than it is today and in fact was smaller than SABMiller at the time). But InBev was not prepared to pay the premium required by SABMiller’s shareholders and so the deal fell through.
Currently, there has been no confirmation that any talks have taken place in recent times. Indeed, under London Stock Exchange rules, SABMiller would be obliged to notify the takeover authorities of such talks if they were deemed to be price-sensitive. The deafening silence from SABMiller suggests an absence of any talks.
At a purely superficial level, it is easy to see why such a mega-deal makes sense. While the two companies have largely grown by acquisition in the past twenty years or so, there has been remarkably little geographical overlap between them. If such a deal were to occur, regulatory approval in the different geographies in which they operate would hardly be an issue, with the notable exceptions of the US and China. In both of these jurisdictions, it is likely that the combined group would be forced to dispose of the SABMiller assets (Miller-Coors in the US and CR Snow in China), probably at a heavy discount to net asset value.
But there are other reasons why such a mega-deal just doesn’t make sense and why we do not believe it will happen, at least not in the foreseeable future.
Take Castel, for example, in which SABMiller holds a 20% stake. This is the company’s joint venture partner in the rapidly growing African beer market (outside of South Africa) and SABMiller has a pre-emptive right to make a bid for Castel in the event of that company ever wishing to sell. In the event of a change of control of SABMiller, it is not clear whether or not that pre-emptive right would remain and thus potential value could be lost in a an ABI-SABMiller merger.
If SABMiller were acquired by ABI at a 30% premium to the current share price, executive management share options that vested automatically on such a deal being consummated would be worth around $1bn. It is unlikely that these executives would be inclined to stay with the combined entity and even if they did, their incentivisation levels would surely decline appreciably.
But the main reason why we don’t believe that ABI will be making overtures to SABMiller (at least in the short to medium term) is the numbers just don’t make sense at this point in time. ABI only recently digested its 2008 acquisition of Anheuser-Busch and still has a lot of debt relating to that deal. To fund an $80bn or $85bn acquisition of SABMiller using debt would stretch its balance sheet to unacceptable levels. And while InBev was able to take on a huge amount of new debt to finance the Anheuser-Busch acquisition in 2008 that was not problematic, as Anheuser-Busch’s cash flows were almost entirely denominated in US dollars. SABMiller’s cash flows, on the other hand, are mainly derived from Colombian pesos and South African rands, which are more difficult to gear up in international debt markets.
The bottom line is that a deal between ABI and SABMiller appears unlikely in the foreseeable future, though we don’t discount it completely in the longer term. In the meantime, we are very happy with our SABMiller holding in our model portfolio.
*Chris Gilmour is an Analyst at Absa Asset Management Private Clients
3 Nov. 2011