The strategy of the company of growth through mergers and acquisitions are one of the most efficient to increase market shares and sales volume. However, this approach leads to a series of new problems for the companies involved in the merger. In a developed market, there are regulatory problems that cost money.
Whereas this affects the external changes which are to be made, the cultural differences between two companies are part of the internal problems which may arise in the wake of a massive merger. SABMiller has traditionally been a company with a high focus on CSR. We have not seen that from ABInBev, which might pose a problem.
As seen in the PESTEL analysis, the water consumption to produce beer are extremely high, both with respect to the actual production, but also the irrigation of the locally sourced crops required to produce beer. Similar tendencies are seen in Latin America, with water scarcity in agricultural areas. Their CSR policy from Africa can be used in other markets, where the CSR policy is less visual, and by that eliminating costs related to developing new CSR policies.
Through this large merger, both breweries are also facing CSR problems. The costs associated with getting all of the brewing facilities aligned on their production methods can result in costly affairs. According to World Research Institute the water stress level in countries such as South Africa, Argentina, Paraguay and the United States, are in the medium to high-stress levels. This means that both companies engage in operations within areas where water pressure issues are present. Meaning that they are unable to outsource production of specific crops to other “home market” countries, by then lowering their overall company water usage. As mentioned above, the costly affair to get all facilities aligned could result in unforeseen costs. As well, their raw material production could influence their water usage, in order to cope with new demands for their combined product portfolio.
Though this is unlikely to have the largest impact, due to the relatively high correlation between crops required to produce the different types of beer. (Shale Resources and Water Risks, u.d.)
Selling of products from the portfolio is also needed as part of the antitrust laws, which ABInBev are facing in some markets, for instance in the United States and Europe. These antitrust laws have forced ABInBev to be selling out brands such as Miller. This will result in ABInBev and Millers Coors to be competitors on United States beer market.
SABMiller is well established in the African market, their knowledge of what drives the markets, both the commonly known but also the unspoken knowledge are of high value to any companies who’d like to engage in activities in Africa. Africa has high entry barriers, and ABInBev knows this.
Latin America and Africa, we believe is the key for this merger. The market in Columbia, for example, is not a market that can be entered. SABMiller is with the Santa Domingo family in a monopoly position.
ABInBev’s roots date back to several markets including the North- and South American market as well as activities within Western Europe. Their knowledge within these markets has come through a series of mergers fuelled by the general culture within ABInBev.
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Combining the skills and experience of these four large markets will make the company able to operate with multiple strategies across the various markets, as well as deriving additional growth within some struggling markets. Launching new products in already well-established markets will provide a broader particular product diversity. The combined brewery will be able to implement the required strategy to the markets in which they would fit the most.
We believe the clash of company culture might be the biggest problems in this merger. Whereas the culture in ABInBev is focused heavily on expanding and growth factors, the culture in SABMiller is more focused on a better environment and the employees. Carlos Brito is incredibly focused on only having high achieving personnel. Of course, SABMiller couldn’t be the second largest brewery in the world without a similar mindset, but the way Carlos pushes his way of work down through the company culture could prove to be a struggle to incorporate within SABMiller. According to (Damodaran, The value of control: Implications for control premia, minority discounts and voting share differentials, June, 2005) the change in management could lead to increased growth. In most cases when a management change will happen, the market has anticipated this resulting in a negative influence on the stock prices, but in the ABInBev SABMiller case, the new management with CEO Carlos Brito in front they market has anticipated an influential figure actually valuing the stock even stronger at a higher price. As the article states, companies with a bad management should receive a stock price increase whereas the opposite imposes a negative stock price. (Damodaran, The value of synergy, October, 2005) The decentralisation of ABInBev is also something they will need to address. They will simply have significant problems pursuing this strategy in Africa. Here local presence is key.
18.0 Conclusion
ABInBev and SABMiller are the two biggest breweries in the world. Merging these two through and acquisition of SABMiller This requires a serious amount of resources. These resources include; a large amount of equity;
time from employees, management, external analysts as well as government instances; local societies who are to live with the combined firm as well as the consumers of beer.
Both companies date back through centuries, marking them as some of the oldest breweries in the world.
Through this long history of operating breweries and serving beer for the public, mergers and acquisitions have been one of their key reasons for reaching new markets. A deal of this magnitude is one of the few largest acquisitions of the history, ranking at number 5. This acquisition is so vast that it will influence multiple areas, as we have seen through our thesis. One of the most touched areas which are also the one which we believe the most value will be derived from, are the African beer market which will now be under control by ABInBev through SABMiller. However, in Africa, there are multiple issues which are to be addressed in order to create a mega-brewery that will function just as well as either SABMiller or ABInBev did in their standalone scenario. We believe, as seen above that Africa is one of the primary drivers behind this transaction.
Alongside Africa there are a series of other global issues, such as water scarcity in the major market including
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Africa, Latin- and North America, lack of purchase power in the Africa population, changing beer demands and a health trend which disrupts most of the food and beverage industry, addressing these issues correctly are key to a successful merge. SABMiller alongside WWF is deeply involved in addressing the water issues in Africa, however, at the cost of profits for SABMiller. ABInBev is well-known for reducing operating expenses to drive profits upward as well as only engaging in problems which come to their own benefit by increasing company value. This clash of CSR policies is something which could potentially hinder a smooth merge, leaving bumps along the track in the combined company. 3G Capital does just not represent SABMiller’s values.
Since ABInBev and SABMiller mainly operate in different markets, the clash between market split in their key markets is not something which should develop large-scale problems, except in North America. In North America the two breweries had a market share exceeding 50%, resulting in antitrust engagements. This led to carve-outs of multiple brands from their combined portfolio, including the highly profitable brand MillerCoors.
Together with the operations in different markets the breweries also operate on various quality spectra. Both breweries of course possess multiple low to high-end products, but the fact that SABMiller’s home market is in South Africa and closely located markets, their products are finely tuned to these customer demands. Africans to not buy foreign beer and have a different profitability and price sensitivity than other markets.
Trends in the beer markets in most Europe and North America are in the stage of changing. This change includes a higher demand for high-end products, based on locally sourced raw materials as well as individual flavours for the specific purposes, a more refined product.
Africa we believe might be the key, and also the main reason for this merger. We believe they take a risky bet, but then again one could ask what choice do they have. If Africa takes off, they will by far be the biggest player in the market and capture most of the growth occurring here. This in combination with entrance to new countries with high entry barriers in Latin America, we believe is the most valuable in this merger. Columbia, as mentioned, is a market with potential for cost cutting, due to their state of monopoly.
One could not but to ask if ABInBev has taken a bigger bite than they can chew. They really need the growth in Africa to justify to investors that this will pay off in the long run. As an individual investor, I would ask myself twice if I see value in the coming years from this. There is, of course, the possibility that ABInBev will start increasing prices in markets with a big market share. With this power comes responsibility, and we have no doubt Carlos Brito will do what he can to exploit it.
By acquiring SABMiller, ABInBev eliminates their closest rival in the global competitive landscape, shooting themselves in a league containing only 1 player, ABInBev. Through this, they are the undisputed global market leader, with a company possessing so much more market share than other breweries as well as the predicted new golden egg – Africa. This is also part of what ABInBev pays for through this deal.
This thesis is subjective, and the authors seem to disagree with much of the market. Our estimates could always be strongly underestimated, but we believe we have put ourselves on the offensive side when it comes to synergies.
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