Beer buyout brews regulatory concern

BY Matt Atkins

Glasses were raised all round at Anheuser-Busch InBev (InBev) earlier this month, when the world’s largest brewing company announced a record breaking agreement with British rival SABMiller. In a deal that ranks among the top five largest in corporate history, on 13 October SABMiller accepted “in principle” a takeover offer of £68.6bn, or £44 a share. However, the jubilation in both camps has subsided somewhat as regulators worldwide cast a suspicious eye over the deal.

When completed, the takeover will see InBev’s dominance of the global beer market swell significantly. At present, the company holds a 20.8 percent share of the sector, set to increase to 29.7 percent upon the deal’s completion. InBev, which already dominates the market, will dwarf its closest rivals Heineken, Calsberg and China Resources Enterprise, which hold 9.1 percent, 6.1 percent and 6 percent of global sales, respectively.

With SABMiller producing brands including Peroni and Grolsch, and InBev’s products including Budweiser, Stella Artois and Corona, the resulting brewing giant will produce approximately one in three of every beer consumed globally. But even as InBev circled SABmiller, the smaller firm was quick to point out that any merger would create problems with regulators in the US and China. It now appears this was no hollow warning.

On 20 October, the US Senate Judiciary Subcommittee on Antitrust announced plans to examine the takeover. “We want to know what the impact is on American consumers, how it affects small craft brewers to be able to get product to market and how [AB InBev] would ensure this wouldn't have a major impact on price or market entry,” stated Amy Klobuchar, Democratic Senator and one of the top lawmakers on the subcommittee.

While the US Justice Department remains the sole arbiter of antitrust oversight in the US, the Senate subcommittee hearing will offer US lawmakers a chance to grill key players in the beer industry on the consequences of a combined InBev-SABMiller. InBev claims that it has already examined any potential regulatory issues and “intends to work proactively with regulators to resolve any concerns”. Indeed, the brewer is understood to have gauged the interest of Molson Coors about buying-out SABMiller’s 58 percent stake in their US joint venture, MillerCoors, in an attempt to ease concerns over regulatory issues.

The takeover faces further hurdles in China where antitrust regulators are set to play a decisive role in shaping the final deal. This is not the first time that the beer behemoth has come under Chinese scrutiny. The creation of Anheuser-Busch InBev in 2008 made antitrust history as it was the first high-profile case to test the powers of China’s merger watchdog in the Ministry of Commerce (MOFCOM). Since then, the unpredictable regulator has gone on to become one of the three key merger jurisdictions alongside US agencies and the European Commission. While China is unlikely to halt the deal, it is expected that MOFCOM will force InBev to offload SAB’s stake in China’s joint venture, Snow, the world’s best-selling beer – a heavy price to pay which may see investors question the deal’s price tag.

Criticism of the deal has not been limited to fears of monopolisation. Citing InBev’s reputation for aggressive cost-cutting, and concerns the deal will lead to heavy job losses, a number of South African unions have voiced their opposition to the bid. In addition, SABMiller’s fourth-largest shareholder, South Africa’s Public Investment Corp (PIC), recently met with InBev chief executive Carlos Brito to discuss such concerns. PIC, which owns a 3.14 percent stake in SABMiller, has previously demanded that the combined company be listed on the Johannesburg Stock Exchange and that all efforts are made to preserve local jobs. It has also said that InBev must support secondary industries linked to brewing, such as agriculture, and bring real benefits to the South African economy.

Placating any African opposition to the deal will be of great importance to InBev, which views access to the continent as a ‘critical driver’ of the buyout. Africa was SABMiller's fastest growing region in the year ended 31 March 2015, with revenue jumping 9 percent to $7.5bn and sales volume rising 5 percent. The purchase of SABMiller will provide InBev with an opportunity to make headway in this growing market, which it has so far failed to capture. SABMiller’s existing expertise, distribution networks and infrastructure will certainly help InBev mitigate the traditional risks associated with investing in this market.

Despite the hoops that InBev may be forced to jump through, the company remains committed to completing the deal. The beer giant sought to reassure investors on 28 October that the takeover remained on track, confirming it had ample financing for the deal, which could be raised “at short notice”. The UK Takeover Panel has also agreed to an extension of the deal’s deadline, and InBev now has until 5pm on 4 November to make a formal offer. However, the brewing giant would be wise to take this time to consider the sacrifices it may be forced to make in the pursuit of its competitor.

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