It's Miller Time for Grolsch

SABMiller has offered $1.2 billion for the Dutch brewer. Can the mass-market beermaker reap the benefits of the well-known brew without damaging its reputation?

Beer is brewed all over the world, but discerning drinkers will settle for nothing less than suds originating from somewhere between Amsterdam and Prague, the region where the art was perfected. That, at least, is the rationale behind beer giant SABMiller's $1.2 billion offer, announced Nov. 19, for Dutch brewer Grolsch. "Grolsch fills an important gap in our portfolio, which lacks northern European brands," SABMiller Marketing Director Nick Fell told analysts during a conference call.

London-based SABMiller (SAB.L), whose brands include Miller Lite in the U.S. and Czech-brewed Pilsner Urquell, is betting even beer drinkers in South Africa and Brazil will be willing to pay more for Grolsch (GROLC.AS), which is brewed in Enschede, Netherlands, and still sold in bottles with a ceramic stopper.

More Consolidation Brewing

Selling Dutch beer in emerging markets may seem counterintuitive, but in fact SABMiller is following a template used by all the big international brewing groups in the last decade. In an industry that remains surprisingly fragmented, with thousands of local and niche brands, the big beer groups such as Belgium's InBev (INTB.BR) and Amsterdam-based Heineken (HEIN.AS) have learned to embrace diversity. They've acquired brands with cachet or a loyal following, then applied their marketing and distribution clout to serve the brews to a wider audience.

Heineken, though best known for its namesake product, owns more than 120 other brands, including Amstel Light in the U.S., Turbo King in the Democratic Republic of Congo, and Presidente in the Dominican Republic. InBev is best known for Stella Artois and Beck's, but it also owns some 200 local brands. In fact, thanks to a relentless wave of acquisition, more than half of global beer volume today emanates from the top seven brewing groups. "In the last 15 years we have seen dramatic consolidation," says Gerard Rijk, analyst at Amsterdam-based ING Group (ING.AS).

The consolidation is not over yet. Heineken and Denmark's Carlsberg (CARLB.CO) are jointly bidding (, 10/18/07) for British brewer Scottish & Newcastle (SCTN.L), which they value at $20 billion. Management at S&N, which makes Australian megabrand Foster's and Newcastle Brown Ale, says the offer price is too low. There also has been speculation that SABMiller could bid for S&N, which has no controlling shareholder and is therefore a ripe target. However, an SAB bid now is considered less likely, given the Grolsch deal.

Leveraging Premium Brands

Brands with enough prestige to command a higher price than everyday suds are particularly valuable to international brewers. Premium beers are a small but growing and highly profitable segment in the emerging markets where SABMiller, with its roots in South Africa, is particularly strong. "We see significant potential across Africa and Latin America, where the premium market is still in its infancy," SABMiller's chief financial officer, Malcolm Wyman, told analysts.

Although Grolsch has wide global name recognition, 75% of its sales are still in the Netherlands, meaning there is lots of upside internationally. Drinkers rate its taste to be more accessible than SAB's somewhat bitter Pilsner Urquell, yet Grolsch still shares with Heineken a certain Dutch flavor not found, for instance, in American beers. SABMiller will try to market Grolsch in places like Colombia where upwardly mobile beer drinkers want a beverage that conveys status but doesn't challenge their taste buds too much. "The big opportunity is to take this into other markets SAB is already big in," says Lehman Brothers (LEH) analyst Ian Shackleton.

Such a strategy is not foolproof. SAB marketers will have to take care they don't damage the authenticity of the beer as they take it mass market. Grolsch traces its history to 1615, a heritage that accounts for much of its reputation. SABMiller executives dodged questions from analysts about whether they will brew Grolsch outside the Netherlands, a move that would probably cut costs and produce fresher beer, but possibly offend purists.

For SAB the risk is relatively low. Although the takeover offer is 84% higher than Grolsch's average share price the preceding month, SAB can easily finance the deal from cash flow. Analysts for Standard & Poor's said in a note that the price is high but will not change SABMiller's debt rating. By the standards of international brewers, "This is quite a small deal," says Shackleton.

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