In the past week, recent developments in Anheuser-Busch InBev and SABMiller’s expansion plans have drawn attention from investors looking to quench their thirst for opportunity in the beverage market.
Anheuser-Busch InBev and Group Modelo
Back in June, Anheuser-Busch InBev (NYSE: BUD) announced it would acquire the remaining 50% stake in Mexico-City-based Group Modelo in all-cash transaction of $20.1 billion. The announcement excited investors, as shares of Anheuser-Busch InBev rose almost 9% that same week. Since June, the firm’s share price rose to almost $95 (up from $73 a half year ago) following extremely positive performance. Early this week, however, the Department of Justice filed a lawsuit looking to block the acquisition, which knocked off $10bn in market value for AB InBev. While the current share price of $88 may not seem like a bargain, the recent dip could make now the opportune time to hop on to Anheuser-Busch InBev.
AB InBev, the world’s largest brewer, controls almost a quarter of the global market share and brought in more than $39bn in revenues in 2011. AB InBev, looking to expand its dominance in the beverage market, identified Group Modelo as a great acquisition target; with 63% of the Mexican beer market and brands such as Corona and Modelo, the firm seemed to be a perfect fit.
The Department of Justice, however, has a couple qualms with the deal; first, the acquisition would lead to too much consolidation in the US beer market and secondly would give AB InBev too much power in the supply and distribution chain. Certain analysts predict that AB InBev and the DofJ could reach a settlement that would include the sale of certain assets, such as bottling plants, which would make the deal more favorable in the eyes of the government.
Now what does this mean for investors? The pending transaction provides an opportunity to profit off the outcome. If you believe the deal will go through, going long on AB InBev now could be a smart move. If the deal goes through, AB InBev will have a clear path to dominate the Mexican beer market, which may significantly boost the firm’s bottom line. Also look out for Constellation Brands, which has fallen in the past week as well. Constellation, which currently distributes Modelo’s products in the US, would retain full rights to continue doing so after the merger and would be benefit greatly from a settlement.
SABMiller & King Enterprises
In a much less controversial deal, China Resources Snow Breweries, a joint-venture between SABMiller (OTC: SBMRY) and a Chinese government-backed corporation, purchased Guangdong-based Kingway Brewery Holdings for $851mm on Tuesday. SABMiller, the second-largest brewer in the world, has had a very successful history of acquiring companies in foreign markets and turning them around. Certain analysts, however, doubt the synergies of the acquisition and believe Snow Breweries overpaid for a failing company.
In the past couple of decades, the Chinese beverage market has been an interesting challenge for Western brewers; the country’s diversity, size and culture, paired with government regulation, have all proved to be significant barriers to entry to the largest beverage market in the world. SABMiller has spearheaded the trend of Western brewers attempting to break into the Chinese market and has done so successfully. SABMiller’s joint-venture produces Snow Beer, which is the leading beer by volume in China. If SABMiller is able to realize synergies and up its production with the merger, it could further solidify its position in the Chinese market. Make sure to keep a look out for SABMiller’s OTC-traded pink sheet as it attempts to integrate the new acquisition.
Written by Kapitall contributor Sherif Hamid
Kapitall's infographic on the recent Decline of Big Beer and the Rise of Craft Brews: