It's Miller Time in Johannesburg

SAB wants to buy the big brewer and take on Anheuser-Busch

For South African Breweries PLC (SBWUY ), the end of apartheid and the fall of communism in the early 1990s wasn't just a political watershed--it was a clear signal to start selling more beer. With sanctions gone and new markets open, SAB quickly moved into sub-Saharan Africa, Eastern Europe, Latin America, even China. Now the Johannesburg brewer is planning its most audacious move yet--buying troubled Miller Brewing Co. and barging into the biggest market of them all, the U.S.

It has been quite a spree. Using the cash it generates from its stranglehold on the local market, SAB snapped up beer companies worldwide to become the world's third-largest brewer, with $4.2 billion in revenues and $359 million in profit last year. Now, SAB is expected to buy Miller from Philip Morris Cos. for some $5 billion in stock and assumed debt, with an announcement to come any day.

A Miller deal would be the crowning achievement for SAB Chairman Jacob Meyer Kahn and Chief Executive Graham Mackay. Adding Miller to the SAB stable would move the brewer to second place globally, behind Anheuser-Busch Cos. and ahead of Heineken. But trucking more Castle Lager up to Zambia, or taking possession of a Polish brewery at a fire-sale price, is one thing. Reviving long-ailing Miller while taking aim at giant Anheuser-Busch on its home turf is a challenge of a different magnitude. Can a company based a world away, with no significant operations in any developed country, pull this off? SAB thinks so. "South African managers are, frankly, tough guys, so we are well-prepared to move out into some of the other tough places in the world," says Nick Chaloner, a member of SAB's executive board.

The market has given the deal a thumbs-up. The London-listed stock has jumped 10% since reports of the deal surfaced. Miller has floundered as part of the huge Philip Morris (MO ) tobacco and food empire. Its heyday was in the 1970s, when it invented the light-beer category. It still makes money, but its profit per unit is only half of Anheuser-Busch's. SAB might be the answer. One Miller exec is high on the deal. "We can get out from under the wing of Philip Morris, where we're really an afterthought," he says. And SAB knows how to squeeze the most out of a brewery. "If you've earned your spurs in Africa and China, you can be efficient in any market," says Ian Shackleton, global beverages analyst at Credit Suisse First Boston in London.

SAB, founded in Johannesburg in 1895 to serve thirsty gold miners, gets 47% of its revenues in South African rand, which has fallen 80% against the dollar over the past dozen years. The rand's depreciation in the past two years has, in dollar terms, shaved $2 billion off of SAB's annual revenues. So besides picking up market share, SAB is coming to the U.S. for the hard currency, as many immigrants do. It also gets the No. 2 U.S. distribution network, which will give its Pilsner Urquell, the premium Czech beer it purchased in 1999, a big boost.

Miller time certainly is a gamble for SAB, though. Ingesting a company almost as large as itself will stretch an already lean head office just when SAB is juggling lots of acquisitions. Moreover, the deal would dull SAB's sheen as a high-growth company. "Miller's brands are tired, and we feel that any company buying Miller may be attempting to catch a falling grand piano," says Ilan Stermer, beverage analyst at Barnard Jacobs Mellet Ltd. in Johannesburg.

SAB execs are used to dealing with adversity. They learned how to sell beer in the darkest days of apartheid, for example, by hiring and promoting blacks to distribute in the often dangerous townships. SAB now controls 98% of the South African market. They'll never get close to that share in the land of Bud. But these tough guys may just get more Yanks drinking Miller again.

By John Koppisch in New York, with Gerry Khermouch in New York and Kerry Capell in London

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