Big Beer's Global Takeover Binge

Investors aren't toasting Belgian brewer Interbrew's acquisition of Brazil's AmBev. Like it or not, the deal marks a growing trend

By Jack Ewing

Interbrew (IBRWF ) CEO John Brock bragged at an analyst meeting in Brussels that the Belgian company's merger with Brazil's AmBev would create the largest brewer in the world. That's true, at least in terms of the sheer volume of suds -- 5 billion gallons a year. And the combined entity will be worth $11.9 billion a year in annual revenue. That's still behind Anheuser-Busch's (BUD ) $14.1 billion in 2003 revenues -- and some industry watchers think that even in terms of volume, Interbrew may not stay the biggest brewer for long.

In a business that has already seen some impressive deals in recent years, Interbrew-AmBev could prompt another wave of consolidation among beermakers, none of which has yet achieved anything close to global dominance. The question is what comes next -- and whether the deals will be good for shareholders.

So far, the industry has seen lots of mergers where one of the big international brewers buys a smaller, regional brewer. One example is Amsterdam-based Heineken's (HINKY ) $2.4 billion purchase of Austria's BBAG in 2003, which gave a Heineken a commanding position in Eastern Europe. Another big deal last year was South Africa/London-based SABMiller's (SBMRY ) acquisition of Italian brewer Peroni for $785 million.


  The rationale is basically the same: Big brewer buys smaller brewer, spiffs up local brands, modernizes production, and uses the local distribution to boost sales of its premium international beers. Indeed, Interbrew plans to use AmBev as a platform to boost sales of its Stella Artois and Beck's brands in Latin America, while introducing AmBev's Brahma brand in Europe.

Now, some say, the pressure is on to create a new scale of beermaker. "Everybody in the top 10 must be questioning where they go from here, and whether they can make it alone," says Ian Shackleton, who follows the beer industry for Credit Suisse First Boston in London. He cites Scottish & Newcastle, a British brewer with holdings as far away as China, as a likely partner for one of the majors.

And everyone in the business is watching St. Louis-based Anheuser-Busch, which is still the world's largest brewer by sales, but has been relatively conservative outside the U.S. SABMiller has openly declared its interest in further acquisitions.

Are big mergers really a good idea? Shareholders are underwhelmed by the Interbrew-AmBev deal. Interbrew shares were little changed in the wake of the merger, while AmBev shares have plunged 18%. Investors also have reacted skeptically to previous deals, with good reason. Beer assets remain pricey, and acquirers may not earn a return for many years.


  Interbrew promises that the $7.3 billion AmBev deal will deliver profits by 2007 at the latest, but that remains to be seen. In addition, some are already criticising the deal as a windfall for AmBev's controlling shareholders at the expense of preferred shareholders, who won't get a premium for their shares. (AmBev defenders respond that the preferred shareholders will see better dividends as part of a combined group.)

In addition, big mergers may prove very complicated to execute. Many of the large brewers, including Anheuser-Busch and Heineken, are controlled by families more concerned about preserving the corporate heritage than getting a big payoff. "Money is not going to convince them to sell," says a banker who has been involved in big beer mergers. He's skeptical that a rash of beer megadeals is coming. "You can argue that Interbrew-AmBev may spark a trend, but it's actually quite difficult to do."

A board member at one of the major breweries agrees. "We did not wake up this morning and say, 'Gosh, what are we going to do?'" he says. Beer-company shareholders may actually be happy to hear that.

Ewing is a correspondent in BusinessWeek's Frankfurt bureau

Edited by Beth Belton

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