This Brewer Has an Unquenchable Thirst

Buying the U.S.'s Miller Brewing is just the beginning for SAB

Forget the champagne, it's celebratory six-packs all around. On May 30, South African Breweries (SBWUY ) CEO Graham Mackay pulled off the biggest beer acquisition in history with the $5 billion purchase of Miller Brewing from U.S. tobacco-and-food giant Philip Morris (MO ). More than a year in the making, the deal catapults the emerging-markets brewer into the No. 2 spot worldwide, behind Anheuser-Busch Cos. (BUD )

But Mackay isn't one to settle for second place. With the ink on the documents barely dry, the 52-year-old executive is hinting that this purchase will not be his last. While SAB may not be a household name in the beer-guzzling U.S.--at least not yet--the 107-year-old brewer has been a driving force in the consolidation of a highly fragmented industry. Half of SAB's estimated $3.6 billion in revenues this year will come from its foreign holdings, which span Eastern Europe, Latin America, and even China. "We regard ourselves as players in the ongoing globalization of the beer industry," says Mackay. "Miller is not the endgame."

It is, however, the crowning achievement to date of Mackay's career at SAB. He joined the company in 1978 when it was a purely South African conglomerate with interests ranging from beer to bootmaking. A systems manager, Mackay was hired to "fix a foul-up in SAB's computers." He zapped the glitch and quickly began moving up the ladder, running SAB's South African beer business and taking on other senior roles before being tapped for the top job in 1999. That was also the year Mackay moved headquarters to London. His goal was to boost SAB's international profile and ability to raise funds.

Mackay's well-appointed offices in Mayfair are a long way from what he says was an "idyllic" childhood on a farm in Swaziland. These days, SAB's boss, who's partial to Savile Row suits, spends most of his time jetting around the globe visiting SAB's 108 breweries. Mackay isn't a big believer in micromanagement, preferring to give local operations plenty of autonomy. Observers say this has bred a strong entrepreneurial culture within SAB, something the chief is determined to preserve. Mackay is endowed with a phenomenal memory that permits him to discuss in depth the minutiae of manufacturing processes or China's countless regional brewers with ease.

Analysts believe Mackay could clinch another big deal before 2003, to build up the kind of distribution clout that is the key to success in the global brewing game. The likely target: Britain's largest brewer, Scottish & Newcastle. Sources close to the company say Mackay has been mulling a three-way tie-up among SAB, Miller, and S&N for more than a year. Such a combo would become the word's largest brewer by volume and would generate some $14 billion in sales.

Until recently, big deals were few and far between in the brewing biz, which has hundreds of regional brands, many of them family-owned. But analysts say SAB's purchase of Miller could change the industry's dynamics. "This is a defining deal for SAB, and it signals that consolidation has moved on to a new level," says Ian Shackleton, a beverage analyst at Credit Suisse First Boston Corp. in London.

For now, Mackay has his hands full with Miller. Although still ranked No. 2 in the U.S., with $4.2 billion in annual sales, the Milwaukee brewer has been ceding market share to rival Anheuser-Busch. "Miller has lost its way, and their brand has eroded," says Tom Pirko, president of beverage consultant Bevmark Inc. in Santa Barbara, Calif.

Many analysts believe Miller will fare better with SAB. "Miller owned by an experienced brewer is more likely to succeed than Miller owned by a tobacco company," says CSFB's Shackleton. SAB, meanwhile, will have access to the second-largest beer-distribution network in the U.S., which should help it bolster sales of its own brands, such as Pilsner Urquell. And in Miller Genuine Draft, it now boasts a premium product to export to places such as Eastern Europe, where there is a strong thirst for American beer.

The Miller purchase also lessens SAB's exposure to the weak South African rand. Because of the rapidly depreciating currency, SAB is expected to report a 4% drop in pretax profits, to $618 million, on sales of $3.6 billion for the year ended March, 2002, according to SG Cowen Securities Corp. With Miller in the mix, SAB's rand-denominated earnings will fall from 50% to 30% of the total, making it easier for Mackay to raise money for future deals. So belly up to the bar, 'cause Mackay is buying.

By Kerry Capell in London

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