International Business: BELGIUM
A BELGIAN BREWER'S PLANS COME TO A HEAD
Until recently, Belgium's Interbrew epitomized many of the beer industry's most venerable traditions. Interbrew boasts roots dating from 1366 and certain recipes concocted by local abbeys. Beer connoisseurs cherish Interbrew's more than 40 brands, including the lager Stella Artois, the cloudy white Hoegaarden, and an unusual raspberry-flavored malt.
Suddenly, this bastion of tradition is emerging as one of the industry's most aggressive global players. On June 6, Interbrew offered to pay almost $2 billion for Canadian brewing giant John Labatt Ltd. This deal comes on the heels of Interbrew's forays into China, Hungary, and Romania. If it is approved by Labatt shareholders, it will turn Interbrew into the world's fourth-largest brewer, up from just 16th last year, when it earned $100 million on sales of $1.7 billion. What's more, Interbrew will be "far more international" than U.S. giants Anheuser-Busch Inc. and Miller Brewing Co., says Steven Dixon, an analyst at Arnhold & S. Bleichroeder Inc.
MOGUL. Faced with mature domestic markets, leading brewers must go global. But Interbrew would need years of costly marketing to take its main beer, Stella Artois, worldwide. The only option is to buy growth. Labatt would give Interbrew a formidable springboard for further expansion. A North American presence is essential "if you want to be an international beer mogul," says Robert S. Weinberg, a St. Louis beer consultant whose clients include Miller and Anheuser. Labatt will give Interbrew 45% of the Canadian market, a rapidly growing U.S. specialty-beer business, and a 22% stake in Mexico's second-largest brewer, Femsa Cerveza.
These businesses have enormous growth potential. In the U.S., Labatt is already among the top three players in specialty beers, the most promising market segment. Since 1987, its U.S. sales have zoomed ahead at a 21% annual clip, while the market as a whole managed just 1%. Labatt figures it can boost its U.S. sales a further 85% by 2000. And that's not counting the addition of Stella Artois, which Interbrew chief Hans H. Meerloo now hopes to position as an upscale quaff in U.S. bars.
In Mexico, Femsa should enjoy strong growth, once the peso crisis subsides. And analysts are speculating that Interbrew may team up with Quilmes Industrial, Argentina's No.1 brewer, to expand into the rapidly growing South American market. Quilmes was a major player in the May 18 hostile bid for Labatt led by Onex Corp. In Europe, Labatt owns Birra Moretti, which has an 11.6% stake in the Italian market. And Interbrew would also get Labatt's 533 British pubs, which would consolidate Stella Artois' position as Britain's top premium beer.
Interbrew's meteoric rise began in 1987 with a merger of Artois, owned by the Flemish De Spoelberch family, and Piedboeuf, owned by the Walloon Van Damme family. Faced with a saturated local market and mediocre results, the families brought in Meerloo, a former ad man at J. Walter Thompson Co. and 20-year veteran of Philips Electronics. Interbrew proceeded to buy breweries in Hungary, Croatia, Romania, and Bulgaria and set up a joint venture with Zhujian Brewery of Canton, China's third-largest brewery. Profits have more than doubled in the past two years.
CONCESSION. Interbrew had been talking about a partnership with Labatt when Onex, Canada's largest buyout firm, launched its hostile $1.7 billion bid for the brewer. Meerloo blew Onex out of the water with an offer priced 19% higher. In response, Onex CEO Gerald Schwartz conceded defeat, praising Labatt CEO George S. Taylor for doing so much to raise shareholder value.
That praise raises the question of why Interbrew offered so much. Virtually all analysts believe Interbrew could have beaten Onex with a bid of $19 a share, 10% less than the $20.80 it offered. Even so, the deal should offer Interbrew rich rewards. "They'll be able to repay over $750 million" by selling Labatt's broadcast and sports properties, including its 90% stake in the Toronto Blue Jays, predicts analyst Michael Palmer of Equity Research Associates.
That will leave Interbrew with Labatt's beer businesses. Last year, the core Canadian brewery had an operating profit margin of 22.8%, more than Heineken, Carlsberg, or Anheuser. Palmer says Interbrew could boost margins even more, simply by cutting Labatt's marketing budget. It makes one wonder why other beer giants hesitated in making a play for Labatt. Look for more deals as they copy Interbrew's recipe.By William C. Symonds in Toronto and Linda Bernier in Brussels, with bureau reports