Merger: What Happens to Miller?

The beer world is once again becoming an empire. AB InBev has offered to purchase SABMiller to the tune of $107 billion. The merger will reportedly result in $1.4 billion in annual savings 4 years after the merger is complete. Once the deal has gone through, SABInBev (or whatever their name will be) will now essentially produce one out of every 3 beers worldwide.

Now I know what you’re thinking, will there really be a company that houses both Budweiser and Miller? the answer is  no.

With the purchase of the company, SABMiller will relinquish its 58% stake in MillerCoors to its venture partner Molson Coors Brewing. This will give Molson Coors control of the Miller brand, allowing them to bottle and sell it worldwide. In addition to Miller, MillerCoors also brews Miller Light, Blue Moon, and Coors. Molson Coors is buying the stake for $12 billion and MillerCoors will now become a subsidiary of the larger company. Molson Coors will now be in control of import beers Pilsner Urquell and Peroni. This addition of the Miller portfolio would essentially double Molson Coor’s business as ABInBev relinquished market power in the US.

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The whole premise of the MillerCoors dealing to Molson Coors Brewing is based on regulation. AB InBev and SABMiller were worried that without dealing SABMiller’s stake in MillerCoors that the Department of Justice would be likely to block the deal. AB InBev controls 45% of the US beer market and with the additional 25% that MillerCoors has would be likely to cause a monopoly and thus an end to the potential merger.

Erik Gordon from the University of Michigan commented on the deal and the possibility of a Department of Justice block by saying,”It’s easier for businesspeople to reach agreements with each other than to reach an agreement with regulators,” he said. “Regulators get no reward for reaching an agreement but get praised for being tough.”

The new giant will dwarf its next largest competitor as Heineken has 9% of the global market. The new company will now be able to tackle its largest and most challenging markets of China and Africa. China consumes almost a quarter of the world’s beer and the new company is hopeful that their new presence will bring them success.

Sources:

http://www.latimes.com/business/la-fi-budweiser-sabmiller-20151111-story.html

http://www.denverpost.com/business/ci_29102548/molson-coors-buying-rest-millercoors-12-billion

 

13 thoughts on “Merger: What Happens to Miller?

  1. Government regulations are forcing companies to merge rather than compete. AB InBev and SABMiller’s merge is not unique to the beer industry. The insurance market is experiencing similar strategic moves as Aetna works to buy Humana. The current regulatory market rewards economies of scale rather than increase the quality of the products. Some believe this will only hurt consumers and only benefit the insurance companies. Government regulations distort the market and have reward market inefficiencies rather than competition.

    • Really? Regulation? Then why do we see microbrewers proliferating? Beer is not a highly regulated industry, beyond passing FDA inspections for food safety (and the nature of the brewing process means that of the areas where contaminated food can be an issue, beer is at the “no worry” end of the spectrum).

  2. This deal is interesting to think about. As an American, much of how I see and perceive that state of an industry is related to how it operates domestically. From your blog, it appears that the AB Inbev’s SAB Miller acquisition will decrease its domestic market share, but drastically increase the firm’s global market share. This move is definitely strategic for SAB Miller, as one of our classes’ previous blog posts discussed the huge emerging beer market in Africa and other developing nations. I am curious to see how MillerCoors’ brands perform following the acquisition, and also how SABInbev’s brands perform domestically following the acquisition. Will consumers stay loyal to those SABInbev brands? Or will the MillerCoors brands perform increasingly well and further decrease future SABInbev domestic market share?

  3. In order to acquire SABMiller and jump through some regulatory hoops, AB InBev recently agreed to sell off its stake in Chinese beer company Snow to China Resources Beer. Snow is the world’s number one selling beer by volume and AB InBev’s 49 percent stake is now being sold to China’s government controlled brewer. According to Reuters, in order to push through the merger process, AB InBev sold the stake at a price lower than expected ($1.6 billion). On top of that, it also sold three of its European beer brands to Asahi, a Japanese brewer for similar purposes. This makes me wonder the company’s next step is going to be with regards to its strategy to tackle the Chinese market.
    Source:
    http://www.reuters.com/article/us-china-res-beer-sabmiller-idUSKCN0W407A

    • The cost-benefit analysis of this decision would appear to show that AB InBev’s stake in the Chinese market is worth less than its market share globally. But if Chinese beer drinkers are consuming such enormous amounts of beer, is it really worth selling out in order to reach emerging markets? It seems like a large risk to me. It could be assumed that AB InBev is selling off Snow in order to please regulators, meaning that their acquisition of SAB Miller is worth more than their shares in the Chinese market. I, too, wonder what their next move will then be. Will they attempt to gain traction in China as they are in Africa? And if so, will they be able to given the higher levels of development in the Chinese market compared to other countries?

      • You raised a good point about the trade-off between exploiting new markets and loss of US sales for AB InBev-SABMiller. Note that competition authorities frequently require that merging parties divest a number of brands or operations in order to clear a proposed merger. This has a disciplining effect on the company’s pricing power since companies usually have the tendency of increasing prices after mergers. Thus, AB InBev’s divestitures were really inevitable. Between November 2015 and March 2016, the company sold MillerCoors to Molson Coors and Peroni to Asahi. Also note that despite Snow beer’s sales volume, it is a lower end product in the market. Thus, it is still possible for AB InBev-SABMiller to compete in the premium market.

  4. The Erik Gordon quote poses an intriguing thought for me. In his opinion, for businesses, some strain of economic freedom will yield the best results for firms and consumers. While I personally align myself with that way of thinking, an alternative viewpoint would be if these two firms were not so readily able to reach an agreement. In this scenario, the DOJ would have to step in and enforce current regulation, probably ultimately resulting in the same arrangement. It is important to consider the possible situations that can unfold in these deals when discussing business strategy. While I believe Erik Gordon is correct in his assessment that the DOJ’s only benefit in this deal is the appearance of strictness, it is vital to take the role of the business’s decision makers in considering this route. It may not be the easiest route, but in certain cases it can yield better results than indecision and conflicts between two firms.

    • The DOJ’s benefit as an ongoing structure is not very big, one way or the other. The benefit to consumers however is likely significant. Even if beer rises in price by only 1%, that’s still a lot of money in the aggregate. We’re not talking about a potential post-merger share of 40% vs 30%, we’re talking of a post-merger share of 70%. That’s enough to change strategy in favor of higher prices, and I know of no good reason why anyone besides AB InBev’s shareholders would benefit from that.

  5. Because AB InBev already has a significant share in China, the US, and Europe they’re in fact not acquiring SABMiller as seen in these markets. Antitrust authorities are (with good reason) forcing them to first spin off the local SABMiller operations into an independent firm or (more practical given the time frame of the merger) sell off to existing beer firms. AB InBev knew that would be the case even before they began talks with SABMiller.

    So AB InBev gets no additional market power. And they’ll save how much? $1.4 billion a year, eventually (“from 4 years after”)? Exactly what changes that will let them generate such savings? Furthermore, to be a motivation for the merger, such savings have to be relative to what they would save if there had been no merger.

    So why did they acquire SABMiller? You should be able to find the prospectus for the deal – is it credible?

  6. Assuming that this merger will indeed go through (albeit maybe with different terms pending DoJ approval), I wonder what implications it will have for the microbrew market in the United States, especially given its roots in attempting to stop the craft beer rise. Will the merger suddenly reinvigorate big beer and stop the cession of market share to craft varieties? Or, on the other hand, will this move end up as a boost to craft beer and a detriment to AB InBev? What can we expect to happen from the Miller brand trade from SABMiller to Molson Coors? While these are general questions, I think that this merger has the potential to recreate the beer market, both domestically and internationally, for decades to come.

    • Does this merger affect the US market at all? Executives on both sides expected that Budweiser and MillerCoors would not be part of the same firm, so part of the negotiations prior to the merger were about finding someone who would buy MillerCoors at a reasonable price.

      Ditto Europe and Canada and (per Jier’s comment) China. This merger was really about Africa, the one remaining large, underdeveloped market.

      • While the merger focuses on giving the resultant company an edge in the expanding African markets, I think the merger will still affect the US market somewhat. What would be really incredible, however, is if SABMiller/AB InBev could use this deal to introduce many of the beers that are popular in Africa to other countries such as the US. With SABMiller/AB InBev readjusting their business empire to focus more on Africa, it would not be unexpected for them to also buy out other African companies, such as East African Breweries Limited (who makes the famous Tusker Lager). With such a move, SABMiller/AB InBev would be able to provide the capital to increase production of this beer and distribute it to non-African countries.

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