Thursday, September 18, 2014

Deal Making in the Beer Industry

The recent merger activity in the beer industry illustrates several interesting items that we typically cover in our upcoming Acquisition Finance course.  Given that the class is held in Amsterdam which is the home of Heineken only accentuates the interest.  

To recap:  Heineken rejected overtures from SABMiller to consolidate.  Meanwhile Anheuser-Busch InBev is reportedly raising a financing package of over $100 million purportedly to acquire SABMiller.  What can we learn from this activity?

Mergers occur in waves within the economy.  Merger activity is known to correlate positively with the stock market and has for more than a century.  It is not surprising that we are seeing increased activity near market peaks.

Mergers occur in waves within industries.  This phenomena is more interesting.   Industry merger waves occur because some catalyst makes deals attractive.  Typical catalysts include changes in consumer tastes, new technologies, new markets, changes in regulations and overcapacity within an industry.   Each creates opportunities (or needs) to merge.

As internal growth declines, companies seek deals.  This can be value enhancing or merely a ploy to avoid the realities of the marketplace.  Growth at Anheuser-Busch InBev is now projected to be much lower than in the past.  According to the Wall Street Journal, SAB generates 70% of its earnings from emerging markets which could nicely complement the market positions of Anheuser-Busch InBev.

Mergers occurring early in a deal cycle tend to generate higher returns.  This makes sense as companies enjoy the lower hanging fruit first.  Companies with the greatest opportunities for improvement or synergies are typically acquired first.  

Mergers can be a defensive move.  This could have been a reason SAB was courting Heineken, although from geographic diversification point of view the Heineken combination also makes sense.

Ownership structure plays a crucial role in mergers.  According to the WSJ, Atria and the Santo Domingo family control about 42% of SAB.  Such large positions are likely associated with increased monitoring and avoidance of bad deals.  When ownership structures are family dominated, hostile deals are quite unlikely.  Heineken Holding N.V. owns just over 50% and the family controls that firm.  

Of course, all this is best contemplated while trying the products mentioned.  I look forward to having a Heineken in Amsterdam while overlooking the Amstel river.

All the best,


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