Brewing the Beerhemoth: Challenges Facing the AB InBev-SABMiller Deal

Posted on by Ji-won Lim

On Tuesday, October 13, the world’s two largest beer companies agreed to a proposed $104 billion takeover of London-based SABMiller by industry leader AB InBev. The Merger would be third-largest in history if the deal is completed, and the combined brewer would command about 30% of the global beer market by volume and about 70% of the U.S. market, based on current figures.1 Ever since September when SABMiller announced that it was the target of a takeover by its biggest rival, there has been a volley of bids, skirmishes in the press, and private talks among the firm’s main shareholders to seek a better price. Under the terms outlined last week, AB InBev would pay a mix of cash and shares to SABMiller’s biggest stockholders – Altria, a U.S.-based tobacco company, and Colombia’s Santo Domingo family – and other investors would receive £44 a share, 50% more than they were worth a month ago.2

While agreeing on a tentative deal was tough for the two brewers, executing the merger will prove to be even more difficult. This is because the global reach of AB InBev and SABMiller would force a proposed tie-up to face intense antitrust scrutiny from regulators around the world eager to determine if the merger would hurt competition (AB InBev agreed to pay SABMiller a $3 billion breakup fee in the event regulators or AB InBev shareholders do not approve the merger).3

Experts agree that the biggest regulatory hurdle will be in the U.S. market, where AB InBev has a 45% market share and SABMiller controls a further 25% through its MillerCoors LLC joint venture with Molson Coors Brewing Company.4 The combined 70% market share makes divestments inevitable, and the U.S. Senate Judiciary Committee’s antitrust subcommittee has already announced that it will hold a hearing to discuss the merger.5 So what is the likely outcome? AB InBev would probably have to sell SABMiller’s 58% stake in MillerCoors, whose brands include Coors Light and Miller Lite. In order to get antitrust clearance, AB InBev might have to settle for a discount because Molson Coors – SABMiller’s US joint venture partner – has the first right of refusal, as well as the right to boost its stake to 50% and name MillerCoor’s chief executive if SABMiller is acquired.6

However, the real question is whether more divestment would be required that would be so great as to challenge the rationale of combining the two companies. This is because “the Department of Justice would look also at the deals that govern distribution, sales, bottling and other operations that affect the control of pricing and supplies.”7 AB InBev already had to dramatically restructure its $20.1 billion acquisition of Mexico-based brewing giant Grupo Modelo SAB in 2013 when the U.S. Justice Department initially blocked the deal – AB InBev ended up agreeing to divest additionally Modelo’s US businesses, giving up a key brewery and selling its interest in Crown Imports to U.S.-based Constellation Brands Inc.8

Another potential regulatory hurdle lies in China, where AB InBev and SABMiller together have more than 40% of the beer market. Chinese authorities could require the brewer to exit SABMiller’s joint venture with China Resources Enterprise Ltd., which has 23% of the market and produces the top-selling Snow brand.9

There are also overlaps in parts of Europe, but lawyers in Brussels are more optimistic than their American counterparts that European competition concerns could be easily fixed. This is because SABMiller, which brews Peroni, Grolsch and Pilsner Urquell, does not have “a blockbuster beer such as AB InBev’s Stella Artois, producing fewer obstacles when the commission considers the deal’s effect on the beer market as a whole.”10 In this vein, dropping one or two small brands in Europe would be unlikely to scupper the deal, especially when AB InBev is attracted to SABMiller’s growth and profits in Africa and Asia markets where AB InBev does little business.11 However, some antitrust experts warn that the firms shouldn’t expect an easy ride in Brussels, since Margrethe Vestager, the European Union’s new antitrust chief, has repeatedly warned that mergers shouldn’t happen at the expense of consumers (Her agency filed formal charges against Google and Gazprom within a single week in April).12

Despite the antitrust hurdles, AB InBev likely will have some flexibility to make the deal go through. According to Anthony Michale Sabino, a professor at St. John’s University, potential concessions for the deal (forced by the U.S. Justice Department) would at worst be “a hiccup on the path to the deal being consummated,” and that “other still-independent brewers like Heineken and Carlsberg might be interested in picking up some brands and/or operations that the combined SABMiller and AB InBev might be divesting.”13 In fact, as noted earlier, the size of the termination fee ($3 billion) suggests that AB InBev is confident in the deal’s prospects as regulators conduct their reviews. At $3 billion, the fee is just shy of SABMiller’s $3.3 billion net profit from its most recent fiscal year.14

AB InBev and SABMiller now have until October 28th to continue negotiations and finalize the bid – AB InBev must submit a final offer or walk away altogether by that deadline.15

 

  1. The Beerhemoth, The Economist (Oct. 17, 2015), http://www.economist.com/news/business/21674381-sabmiller-ab-inbevs-toughest-takeover-yet-it-may-not-be-its-last-beerhemoth; See also Mike Esterl, AB InBev, SABMiller Deal Expected to Face Global Antiturst Grilling, The Wall Street Journal (Sept. 16, 2015, 6:25 PM), http://www.wsj.com/articles/a-global-antitrust-grilling-is-expected-1442442266. ↩

  2. Id. ↩

  3. Matthew Rocco, Can AB InBev, SABMiller Squash Antitrust Hurdles, Fox Busuiness (Oct. 13, 2015), http://www.foxbusiness.com/industries/2015/10/13/can-ab-inbev-sabmiller-squash-antitrust-hurdles. ↩

  4. Esterl, supra note 1. ↩

  5. Diane Bartz, U.S. senators announce hearing on AB InBev’s planned purchase of SABMiller, Reuters (Oct. 20, 2015 1:58 PM), http://www.reuters.com/article/2015/10/20/sabmiller-ma-anheuserbuscha-b-i-idUSL1N12K1PL20151020 (“Senator Mike Lee, a Utah Republican and chairman of the Senate’s antitrust panel, announced the hearing along with the top Democrat, Senator Amy Klobuchar of Minnesota.”). ↩

  6. Esterl, supra note 1. ↩

  7. Scheherazade Daneshkhu, Gina Chon, Patti Waldmeir and Duncan Robinson, Biggest obstacles to AB InBev-SABMiller deal lie in US, The Financial Times (Sept. 20, 2015, 5:49 PM), http://www.ft.com/cms/s/0/c448ea08-5fa0-11e5-a28b-50226830d644.html#axzz3p8dS4IIM. ↩

  8. Id. ↩

  9. Esterl, supra note 1. ↩

  10. Daneshkhu et al., supra note 7. ↩

  11. Id.; See also The Beerhemoth, supra note 1. ↩

  12. Esterl, supra note 1. ↩

  13. Rocco, supra note 3. ↩

  14. Id. ↩

  15. Id. ↩

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