A tale of two companies
In 2003 a report was issued by CVI pointing out Budweiser’s increasing reliance on its flagship brand. The analyst aptly pointed out that this reliance was going to negatively impact the company in the long run, and four years later we can see this was correct. The market value of beer in the United States has barely inched up as the years progressed. The marginal increase of single percentage points is miniscule compared to wine and spirits consumption, which has been increasing at more than double the rate of beer.
Acknowledging this weakness, A-B has in the meantime been testing the waters in hedging its product line. The company is now the sole distributor for three of Vermont Spirits’ vodkas , which are available in northeastern United States. The premium spirits are the latest additions, just last week the company announced a similar deal with Margaritaville Spirits to distribute Margaritaville Tequila in Massachusetts. More speculation around their new products continues, as the company filed a trademark patent for “Pomecai” , hypothesized to be a new vodka flavoured drink that combines pomegranates and açai, a South-American fruit.
Contrary to A-B, InBev has continued making waves on the international scene. Created through a merger between Interbrew and Ambev in 2004, this company has become the largest global brewer by volume. Their growth has targeted seven of the 10 fastest growing markets worldwide. Rather than relying on a single market to drive their sales, the company has four global brands – Stella, Becks, Brahma and Leffe – marketing worldwide, in addition to over 200 local brands creating one of the largest and strongest portfolio of brands compared to their competitors.
Merger talks
In February of 2007, Brazil’s Valor Eonomico newspaper reported that the two companies were engaged in merger talks , driving the share values up of both brewers. Since then, A-B’s stock has increased in value by roughly six per cent, while InBev’s skyrocketed by 18 per cent.
Despite the predictability of the move, many analysts were concerned with the potential value behind the deal. Many consider A-B needing InBev more than the other way around , based on both companies’ current structure and networks. Both companies would benefit from increased size and image, however that alone can’t be enough to drive the companies together. A lack of overlap amongst their markets is one of the key reasons analysts are giving, preventing either company from taking advantage of economies of scale and the like.
However, a merge could open numerous opportunities for both sides of the fence. Combined, the networks of both companies would make a single powerhouse for global beer dominance. With the rising popularity of import beers in the United States, A-B would no longer have to pay service charges for distributing InBev’s beers, and more importantly, InBev could make their best-selling import beers within the borders of the United States, saving on the ever rising shipping costs driven by higher oil prices. Moreover, this could help prevent future “supply disruptions” that have caused low inventories in bars and retailers in recent times.
Also, given the success of InBev implementing their zero-based-budgeting (ZBB) techniques, they could attain massive amounts of cost-savings by doing the same for Anheuser-Busch. ZBB is a method of budgeting each business unit effectively has to create a yearly budget from scratch, justifying each and every expenditure. Over the last five years, this has saved the company upwards of 40-million Euros annually. If implemented across the board, this can lead to cost efficiencies and stronger allocation of company resources.
Push by private equity
Mergers aren’t the only opportunities out there for Budweiser. The company was hinted just this past weekend to be the next target for private-equity buyout. Pershing Square Capital Management alluded to raising $2-billion to purchase a controlling interest in an unknown firm. Expected to be an “iconic” American company , Kraft Foods and hotel chain Marriott International are other potential candidates for the mystery firm. Shares in Budweiser rose to a new 52-week high, reaching $55.19 last Tuesday.
Pershing Square Capital is known to push companies in order to increase the shareholder value. Lead by William Ackman, they are credited for persuading Wendy’s International to spin off the, at the time, underperforming Tim Hortons coffee chain.
Private versus partner
Given the current state of the market, Budweiser would likely fare better in a merge with InBev – providing InBev agrees – because of the immediate benefits achieved through shared resources. A-B would receive a much larger cut of import sales and would be able to continue distributing import brands through its extensive network built in the United States. Moreover, the company is suffering through overall trends in the economy and demographics, not management problems. A private equity buyout wouldn’t dramatically help the situation, unless they planned on liquidating out some of its business ventures. But its Budweiser – an American institution – making a liquidation highly unlikely.
Together, Anheuser-Busch and InBev (In-Busch, anyone?) can create a global powerhouse with their extensive product line up. With Budweiser’s early hold on the Chinese market – they own 27% of Tsingtao, the largest brewer, and Harbins, the fourth largest brewer there – and InBev’s success with streamlining operations, the benefits for both companies far outweigh those behind a private-equity buyout. Though Budweiser has little to offer InBev in terms of growth potential in the United States, the cost savings and greater access to a receptive market of import beers is essential for corporate stability. In addition, the well-recognized and reputable names of the company would likely help their further expansion into the international markets.
Moving forward
Despite the macroeconomic factors that are playing a large role in the American market, consumers are unlikely to cut back on their alcohol consumption as dramatically as they would for other discretionary items like clothing and goods. Drinking habits, like tobacco, are rarely changed unless it is a last resort. As such, the fire burning for Budweiser will have to burn out by the end of the summer. Whether its through an “inevitable” merge with fellow competitor InBev or a private-equity buyout, A-B would be wise to take advantage of one of these options before it loses its crown as the King of Beer.
The Canadian Value Investor © 2007