Bernstein: SABMiller / AB InBev Combination Unlikely

FILED MARCH 3, 2011

Dear Client:

"There has been much discussion in recent weeks and months of the potential acquisition of SABMiller by ABInBev. .... We think it unlikely." So writes Trevor Stirling of Bernstein Research, countering the thesis first put forth by Jim Koch and Credit Suisse.

Trevor writes that the combination "does have some strategic attractions and may possibly have been discussed by the two companies at some point." But while the two companies have very little overlap (except in the US) which makes for minimal "regulatory land-mines", this fact also "reduces the opportunity for classic synergies such as closing redundant breweries, merging distribution networks, etc." We agree with Trevor on this, and in fact wrote about it a few weeks ago.

Also, there would be a clash of cultures. "We view SABMiller as having a very strong track record of creating organic growth, primarily in an emerging market context, both from growing the beer category but also slowly but steadily increasing their share of the beer category. On the other hand, ABI have an incredible track record of improving profitability at acquired organizations..." So could they combine the two? Maybe. "However, we view a mega clash of cultures as much more likely," says Trevor.

Additionally, Trevor writes that some of the "suggested drivers" of a mega-merger "at best red herrings and at worst downright misleading." Which drivers? Trevor says while the US beer business has some weaknesses, it's "not in a death spiral; it's not the fault of the new management teams, in our view." And besides, MillerCoors would have to be jettisoned anyway if ABI buys SABMiller.

What about the three-tier system? Trevor says that the notion that a merger would be a "precursor to a manufacturer-led rollup/consolidation/margin squeeze on the 2nd tier of US beer distribution" is actually a "mythical bogey man which is regularly used to scare beer distributors and create column inches." In fact, Trevor believes that -- in the near term at least -- the vertical integration between brewers and distributors is "neither feasible nor desirable."

Trevor was just getting warmed up. The soft spoken Brit says that some of the descriptions of beer management are "simplistic caricatures. Some commentators have characterized SAB as an ageing bunch of M&A junkies, who see the deal flow slowing and are open to a quick exit. Others portray ABI as refuges from the Texas Chainsaw Massacre, who are only capable of short-term slash & burn tactics."

But bottom line, Trevor says that "there are many significant risks and financial challenges, such that we believe it unlikely that such a deal will ultimately be consummated."

For one, ABISABMILLER would have to "take a haircut" if selling their stake in MillerCoors to Molson Coors, since the latter would have all the leverage as the only viable buyer. They would also take a haircut in selling CR Snow in China for similar reasons.

So in summary, "this deal is much harder to pull off than BUD because (i) SAB offers lower synergies, (ii) SAB's emerging market cash flow makes it harder to lever, (iii) SAB is on a slightly higher multiple than BUD and (iv) the execution risks are much higher."

Both Trevor and Carlos Laboy of Credit Suisse, whose report this report casts doubts upon, will be speaking on a panel moderated by your editor at Beer Summit on Monday. I'm really looking forward to hearing the point, counter-point from these gents. Stay tuned...

A-B VOLUMES DOWN 3%; PROFITS UP

AB InBev reported their Q4 and full year 2010 financial results early this morning. In the US, selling-day adjusted sales-to-retailers were down 3.1% in the fourth quarter, in line with full year STRs down 3.2%. That represents about a half a point of share losses. The good news: pricing and mix rocked the Casbah. "Our price increase in September led to a loss of volume in our sub-premium brands as a consequence of our decision to narrow the price gap between our sub-premium and premium portfolios," wrote ABI. In fact, revenue per barrel was up 3% in 2010, and 4.1% in the fourth quarter, with 1.22% of that coming from improved brand mix.

While sub-premium (and Bud) share declined, A-B "saw improvements in the market share of all four of our premium and super-premium Focus Brands: Bud Light, the Bud Light mega brand and Michelob Ultra gained share for the year; Budweiser's share decline decelerated; and Stella Artois gained share on the back of full year volume growth of 20.6%."

Globally, ABI's topline revenues grew by 4.4%, EBITDA in 2010 increased by 10.6%, EBITDA margin improved by 2% and they generated nearly $10 billion in cash flow. The ABI synergy machine continues. Synergies reached $620 million related to the combination with Anheuser-Busch, including $170 million in the fourth quarter, bringing total synergies by the end of 2010 to $1.98 billion. That's money.

Back to the United States going forward, ABI has set some objectives:

-It notes that Bud Light mega-brand (includes line extensions) is continue to grow volume and share, and ABI plans to "build on this momentum by continuing national activation of existing platforms fully integrated into our commercial plans which are designed to further improve brand health and market share. These platforms include Port Paradise, UFC and Super Bowl as well as new ones such as the NFL."

-ABI notes that the decline in Budweiser in the US has actually decelerated as the year went on and "we will build from this platform in 2011."

-On pricing, ABI says they continue to "refine our pricing to achieve our long-term brand strategies.....In 2011, we will continue to look for opportunities to improve our price segmentation throughout our portfolio in line with our brand strategies."

-On integration synergies, in 2011 "we are expecting to deliver at least the additional 270 million USD bringing total synergies to our commitment of 2.25 billion USD. We see potential upside from sharing best practices and fully exploring topline opportunities, taking us beyond the 2.25 billion USD. However, we will not disclose these amounts separately in the future, as integration is essentially completed."


U.S. BREWERIES OPEN AT A RECORD HIGH - BUT HIGHER LAST YEAR

BA chief Paul Gatza recently reported on the record high number of U.S. breweries: The total count of operating breweries in the U.S. is at 1,701 or 9% more than a year ago, and more than we've had since around 1905.

The post was made in anticipation of a session later this month at San Francisco's Craft Brewers Conference wherein Paul will reveal the total number of breweries that operated (and also those that closed) in 2010, which is higher than now. According to his latest numbers, the BA counts 1,218 operational U.S. breweries as members, and 1,619 total (foreign, in-planning, contract, etc.).

BEER BRIEFS:

NBWA RELEASED A TEASER about its 2011 Leg Conference March 27 - 30 at the Hyatt Regency on Capitol Hill in D.C. Sessions will include a panel on the 112th Congress, a legislative briefing, and receptions and remarks from Charlie Papazian and the BA.

BREWPIC: SHINER LIGHT BLONDE, the brewery's first low (99) cal beer, already in Texas, will go to the company's core markets, first those surrounding the Lone Star State: Colorado, Kansas, Nebraska, Oklahoma, Louisiana, Arkansas and New Mexico. These are the most developed markets where the new offering has the best prognosis. Shiner's overall distribution mix in other markets will focus more on the craft lineup.

Sales chief Mark King is excited about entering the niche of can-clad, low-cal beer - especially with the added differentiator of being blonde. "The 6 and 12-pack is going to be an absolute menace," he says, "key for occasion-based drinking." The new offering will be made with the yeast strain from Shiner and Shiner Blonde.

"We're not targeting [existing players], but we want to play ball. There's a consumer buying light beer, and paying more for it," Mark says.




Until tomorrow, Harry

"A thought is often original, though you have uttered it a hundred times."
-Oliver Wendell Holmes

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