MEGA-DONE! DOJ APPROVES ABI - SABMILLER DEAL With Some Interesting Caveats

FILED JULY 20, 2016

Dear Client:

After a long review and countless industry interviews, the U.S. Department of Justice has approved AB InBev's proposed $108 billion acquisition of SABMiller, creating a behemoth brewer selling around 740 million hectos of beer a year, or about one out of every three beers sold globally.

The DOJ's consent decree has been filed with the judge and is expected to be approved in the second half of the year, and that's when they also expect to close.

As expected, as part of the approval ABI will have to divest SABMiller's majority stake in MillerCoors, their U.S. unit, to Molson Coors.

But there are other interesting caveats as well, (in A-B's words, emphasis ours):

• BRANCH CAPS. AB will not acquire an independent distributor if doing so would result in more than 10% of its annual volume being distributed through wholly-owned distributorships in the U.S. This provision formalizes a commitment AB had previously made.

• NO TERMINATIONS. AB will not terminate any wholesalers as a result of the combination with SABMiller. Again, this formalizes a previously made commitment.

• VAIP IS GONE. The Voluntary Anheuser-Busch Incentive for Performance (VAIP) program will no longer exist. (We anticipated this, see BBD 06-02-2016).

• COMPETING BRANDS NOT FACTOR IN TRANSACTION APPROVAL. We will continue to approve (or disapprove) transfers of ownership as well as Managers and Successor Managers based upon the qualifications and competence of the individual. The sale of third-party beer will not be a factor we may consider.

• MAX EFFORTS TO BEST EFFORTS. The 'Maximum Efforts' standard will transition to a new standard of 'Best Efforts' to sell, market, advertise and promote our brands. This new standard will be defined as "efforts designed to achieve and maintain the highest practicable sales volume and retail placements of our brands."

• CO-OP DOLLARS TO MATCH AB DOLLAR SHARE. Finally, annual spending on promotions and incentives by wholesalers will be based on the proportion of revenues that our brands constitute in your overall beer sales (it used to be based on case volume).

Those are some pretty heavy concessions, although there was no mention of not messing with specific brewers (like Constellation or Yuengling) and no mention of their deal to buy Devils Backbone, so we expect that deal to move forward. What is also missing is a required divestiture of any brands (besides MillerCoors of course), as was anticipated by some.

In a call with ABI's North American chief, João Castro Neves, he told BBD that in the U.S. "this decree clarifies some uncertainties we had" and puts into writing "some of the things we had already said in public." So the branch cap is officially nailed down. It's "up to 10%" not "around 10%" like Brito had said at last year's Senate hearing. Regarding the VAIP program going away, João said that there will still be other "incentives in general" that they will be developing in accordance with the decree.

I asked João if these decrees hamper him in the market. "No, I don't think so. If we think about our decisions regarding [the above concessions], there's very little instance where we strayed" from what is being asked of them now. "We're still investing very heavily in the US. In the past six months we're starting to see the benefits of our increased investments, and that will continue."

QUESTIONS: Will the dumping of the VAIP, not considering competing brands when approving distributor transactions, softening of the Maximum Efforts program, and the cap on co-op promo dollars be enough to assuage craft brewers who have been fighting against this deal? You tell me.

Tying one of A-B's hands behind its back would seem to benefit their largest competitors, mainly a unified MillerCoors, Boston Beer, Sierra, Yuengling, and Pabst. And it also gives A-B distributors a little more freedom moving forward.

IS SABMILLER DONE NEGOTIATING? Meanwhile, as reported this morning SABMiller's board is expected to meet today to discuss the possibility of seeking better terms from ABI NV on its roughly $108 billion takeover, reports the Journal, as agitator investors rattle cages for a sweetened pot.

The board meeting was already on the calendar ahead of the company's annual shareholder gathering, which is Thursday. Stay tuned….

MEGA-BREW: A LONG AND WINDING ROAD

MegaBrew has been rumored for years. But let's take stock of key points along the road to today's DOJ approval, which will pave the way for a single company to control roughly 1/3 of the world's beer:

SEPTEMBER 16, 2015: ANHEUSER BUSCH-INBEV ANNOUNCES APPROACH TO SABMILLER. The tie-up is originally valued at north of $100 billion. SABMiller plays temporarily coy. ABI has 28 days to make a formal offer, a deadline that will be continually kicked down the road.
OCTOBER 13, 2015: ABI AND SABMILLER ANNOUNCE "AGREEMENT IN PRINCIPLE." SABMiller's Board agrees to unanimously recommend to its shareholders ABI's proposal to pay £44 per share to buy them. That valued the brewer at £67.9 billion, or just over $104 billion USD. To make SABMiller's largest shareholders, Altria and Santo Domingo, happy, ABI offers a partial-share alternative for 41% of the stock, "essentially a combination of cash and stock translating into a lower per-share price of £39.03," at premium of approximately 33% to the closing SABMiller share price on Sept. 14. If deal falls through ABI will pay a $3 billion breakup fee.
NOVEMBER 11, 2015: THEY ANNOUNCE DEAL TERMS. ABI and SABMiller announce "agreement on the terms of a recommended acquisition." ABI offers not a full cash deal, but the option to take restricted stock as well (again to please big two shareholders, Altria and Santo Domingo/BevCo). The resulting brewer is said to control about 30% of global beer sales even with divestitures. Heineken, the next largest global brewer, will only command about 9 or 10% of volumes. ABI (NewCo they call it now) will command even more in gross margin.
...AND THAT MILLERCOORS WILL GO TO MOLSON COORS. And, as largely expected, ABI simultaneously announces the complete divestiture of SABMiller's stake in the MillerCoors joint venture to Molson Coors. The total transaction is valued at $12 billion. Molson Coors will also "acquire full ownership of the Miller brand portfolio outside of the U.S. and retain the rights to all of the brands currently in the MillerCoors portfolio for the U.S. market, including import brands such as Peroni and Pilsner Urquell."
DECEMBER 8, 2015: SENATE HEARING ON POTENTIAL DEAL. Senate Judiciary Antitrust Subcommittee leaders Amy Klobuchar (MN) and chairman Mike Lee (UT) vet ABI's proposal to purchase SABMiller in front of a group of lawmakers and interested parties. Brewers Association chief Bob Pease and NBWA head Craig Purser voice concerns about distribution issues in deal wake, from AB's wholly owned distributors and incentive programs to potential post-deal distributor terminations. ABI chief Carlos Brito promises repeatedly that "this transaction is not about the U.S., it's about the rest of the world" and therefore "nothing that relates to this transaction will impact any distributor." He says they intend to own "around 10%" of their distribution [see BBD 12-08-2015].
APRIL 22, 2016: SENATORS SEND LETTER TO DOJ. The two Senators mentioned above send a letter to the DOJ outlining concerns of consolidation in the beer market and urge the DOJ to carefully consider conditions.
APRIL 29, 2016: ABI OFFERS TO DISPOSE OF ALL OF SAB'S EUROPEAN ASSETS. After ABI revealed plans to divest the Peroni, Grolsch and Meantime brands to Asahi, the brewer took it a step further. On top of the aforementioned brands, ABI announced it would shed SAB's operations in Central and Eastern Europe specifically (Hungary, Romania, Czech Republic, Slovakia and Poland). Still, no word on a suitor for these additional brands.
MAY 25, 2016: DOJ LAUNCHES PROBE INTO VAIP. The DOJ reportedly launches an investigation into ABI's wholesaler incentive program. "Investigators at the Justice Department have contacted beer distributors and craft brewers, asking about the incentive plan as well as AB InBev's other steps aimed at curbing craft promotion by distributors," per anonymous Reuters sources.
JUNE 24, 2016: SENATORS SEND ANOTHER LETTER. Sen. Klobuchar pens another letter. This one was addressed to the Head of Antitrust Division, Renata Hesse, over continued concerns that ABI's incentive program and acquisitive nature could stifle craft competition.
JUNE 28, 2016: DOJ INVESTIGATES CRAFT ACQUISITIONS. Sen. Klobuchar must have gotten her point across, because shortly after she sent that letter, the Capitol Forum suggested that the DOJ was probing into A-B yet again, this time over the brewer's recent craft beer acquisitions -- the April announcement to buy Devils Backbone, in particular.

Along the way, there were key international divestitures, and more hearings, like the recent Competition Tribunal of South Africa vetting, which saw Heineken accuse SABMiller of "dirty tricks" in the market. Nevertheless, they approved with conditions as of June 30.

"AB InBev has now obtained approval in 21 jurisdictions. Clearance decisions, with or without conditions, have now been obtained: in North America (US and Canada); Asia-Pacific (Australia, India, and South Korea); in Africa (Botswana, Kenya, Namibia, Swaziland, Zambia, Zimbabwe, and South Africa); in Europe (the EU, Albania, Moldova, Turkey and Ukraine); and in Latin America (Chile, Colombia, Mexico and Uruguay). Approval in Ecuador is subject to certain conditions," per recent brewer communication.

Your candid reactions appreciated: hs@beernet.com

MORE CRAFT CONSOLIDATION: TENTH & BLAKE CONVERTS MINORITY TERRAPIN INTEREST TO MAJORITY INTEREST

It's the age of consolidation, indeed. As CBD just reported, MillerCoors's Tenth & Blake minority interest in almost 15-year-old Athens, Georgia-based Terrapin has just turned to a majority interest, per breweries' announcement. Recall that T&B had previously purchased a minority stake in Terrapin in early 2012.

Terms are not disclosed, but MillerCoors told BBD that the deal is being funded in cash, and Terrapin management will retain equity. Terrapin will operate as a business unit of Tenth and Blake.
The brewer did more than 55,000 barrels last year, up 25%, with the majority done in their home state of Georgia. They are currently in 12 Southeast states as well as the District of Columbia. The company most recently expanded into Louisiana in 2014 and West Virginia in 2015.

The vast majority of their distributor network is already aligned with MillerCoors, of course, and Terrapin management will work closely with Tenth and Blake on remaining network plans, BBD has learned.

And will they expand into new markets? "Job one is to ensure we provide adequate supply to fuel the strong growth in Terrapin's current markets. Terrapin management will determine future expansion opportunities when the time is right," MillerCoors told BBD.

The transaction is expected to complete in August 2016. First Beverage Group acted as financial advisor to Terrapin, and Spencer Fane LLP provided legal counsel. King & Spalding LLP provided legal counsel to MillerCoors.

SCOTT WHITLEY: BREWER WILL HELP THEM BROADEN IPA AND SOUTHEASTERN PRESENCE. T&B chief Scott Whitley wrote to partners today on the deal. He called the partnership "an important regional play for Tenth and Blake as the Southeast is an underdeveloped craft market with significant growth potential," and lauded their "iconic and acclaimed IPAs," which should help T&B "broaden our expertise and presence within these popular styles."

CO-FOUNDER JOHN COCHRAN LEAVING BUT OTHER EXECS WILL STAY. Scott also highlighted some leadership changes. Co-founder and former Terrapin president John Cochran "has decided to take advantage of a new opportunity." VP of operations Brian Hollinger is also leaving "to take advantage of another opportunity."

Current CFO Frank Skorzewski will replace John as Terrapin president.

Dustin Watts will continue in his role as the VP of sales and marketing. The brewery's other co-founder, Brian "Spike" Buckowski, will remain on Terrapin's leadership team as the VP of brewing development.

Terrapin founders Buckowski and John Cochran opened the brewery in 2002 "to craft beers unlike any that were available in the Southeast at the time, choosing Athens as home base because of its distinctive culture and shared appreciation for music." They strive to be among the notable IPA brewers of the South. Their notable brands include year-round and seasonal beers including Hopsecutioner, HI-5, RecreationAle, and Rye Pale Ale.

Until tomorrow, Harry

"Life is an adventure in forgiveness."
- Norman Cousins

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