(Bloomberg) – If Anheuser-Busch InBev can’t grab the beer of its choice, it could settle for a Pepsi.
With almost $90 billion in deals over the last 10 years, including the 2008 acquisition of the maker of Budweiser, no other beverage company spends like AB InBev does. Most of the speculation on the $170 billion beer behemoth’s next move has focused on the industry’s No. 2 brewer, London-based SABMiller. A company of A-B InBev’s size and ambitions has other options though, including PepsiCo Inc.
A-B InBev and its advisers have long studied whether a merger with the $142 billion soda and snacks company makes strategic and financial sense, said people familiar with the matter. However, no talks are happening now, no deal is imminent, and the scenario is among many it has looked at, one of the people added, asking not to be identified because the information is private.
A-B InBev should think beyond the beer market, said Albert Fried & Co. That could put Monster Beverage Corp. or Keurig Green Mountain Inc., even further away from the brewer’s core, on its radar. Either way, A-B InBev probably won’t walk away empty-handed.
The culture of A-B InBev is “really based on doing large deals, making big steps forward,” Richard Withagen, an Amsterdam-based analyst at Kepler Cheuvreux, said in a phone interview. “It’s all speculation what the next step will be. That there will be a next step seems pretty sure, given that I don’t think this company wants to only manage the business and not expand it any further.”
Representatives for Leuven, Belgium-based A-B InBev, Purchase, N.Y.-based PepsiCo and London-based SABMiller declined to comment. Representatives for Corona, Calif.- based Monster Beverage and Waterbury, Vt.-based Keurig didn’t respond to requests for comment.
A takeover of SABMiller would be “boring,” said Sachin Shah, a special-situations and merger-arbitrage strategist at Albert Fried. Regulators would likely force divestitures, and the cost savings from a combination wouldn’t necessarily translate to increased value for shareholders, he said.
“Why am I going to pay a higher multiple for more of a business that you’re already in that’s not necessarily growing?” Shah said by phone. “Anheuser-Busch should become a drinks business, rather than just alcohol and beer.”
A-B InBev and PepsiCo do know each other well, one of the people familiar with the matter said, citing the companies’ bottling arrangement in Latin America. PepsiCo’s soda and snacks businesses both hold appeal amid slowing profits in the beer space, the people said. Any deal between the two would have to be friendly.
One driver for a takeover would be the potential cost and revenue benefits of selling beer and soft drinks through the same distribution system. A-B InBev and its Brazilian backers including 3G Capital billionaire Jorge Paulo Lemann could also improve profitability at PepsiCo like they did after purchasing Anheuser-Busch. Lemann and his two longtime business partners are holders of A-B InBev.
“From a strategic perspective, it doesn’t strike me as too, too crazy,” Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co., said by phone. “If you look at the strengths of ABI, they’re very clearly around cost-cutting and distribution, particularly in a difficult volume environment like beer. I think those could be translated pretty directly to the Pepsi business in the North American marketplace.”
Should A-B InBev decide it doesn’t want PepsiCo’s snack business, it could sell it to one of the many buyers who would be interested in the maker of Lays potato chips and Quaker oatmeal, Dibadj said. The brewer hasn’t shied away in the past from complex deals that involved divestitures.
A takeover of PepsiCo may have a better chance of adding to A-B InBev’s earnings than a purchase of SABMiller, said Withagen at Kepler Cheuvreux. SABMiller has a higher valuation than PepsiCo and less room for margin improvement.
“If you look at their history, those Brazilians have always liked self-help stories,” Ian Shackleton, a London-based analyst at Nomura Holdings Inc., said in a phone interview. “SABMiller does not tick that box.”
One option that might is Coca-Cola Co., he said. There are potentially more “levers to pull in terms of cost-cutting” than at PepsiCo, which has already been trimming expenses amid pressure from activist investor Nelson Peltz, according to the analyst.
Shackleton said the more likely scenario would be that 3G Capital buys Coca-Cola in conjunction with billionaire Warren Buffett, the soft-drink maker’s largest shareholder and 3G Capital’s partner on the more than $20 billion buyout of H.J. Heinz Co. last year. Then 3G Capital could sell the U.S. distribution business to A-B InBev.
“When you look at the Coke distribution system, arguably this is probably the best distribution system of any fast-moving consumer goods company in the world,” the analyst said. “You’re in every country in the world apart from North Korea and Cuba. Couldn’t you actually use that system to distribute other stuff? Beer is a very obvious starting point.”
Buffett said in June there was no chance of a buyout of Coca-Cola after David Winters, an investor in the $195 billion soft-drink maker, suggested he might be plotting one.
A deal for either Coca-Cola or PepsiCo would be a big bet on a soda industry that has growth challenges of its own. Buying a smaller player instead such as Dr Pepper Snapple Group Inc., with a market value of $13 billion, would represent less of an all-in wager, said Shah of Albert Fried.
The brewer could look at the faster-growing markets for energy drinks and single-serve coffee. Coca-Cola announced investments in both Monster, a $16 billion company, and $23 billion Keurig this year. “Why couldn’t Anheuser-Busch do the same thing?” Shah said.
A deal for either could be structured as some sort of joint venture with Coca-Cola, he suggested. Representatives for Atlanta-based Coca-Cola and Plano, Texas-based Dr Pepper declined to comment.
Coca-Cola’s recent agreement to buy 17 percent of Monster will shift distribution away from A-B InBev in the U.S. and Canada. The companies split the job now. Coca-Cola also has an option to boost its stake to 25 percent.
The biggest hurdle to targets outside of the brewery world may be that A-B InBev is simply more comfortable sticking with beer.
“The opportunity is still large enough in brewing to continue consolidation there,” Philip Gorham, an analyst at Morningstar Inc., said by phone. “It’s with other brewers that they’ll get the most cost savings, that they’ll be able to more closely integrate operations, distribution.”
While a Heineken takeover would add another strong brand to A-B InBev’s beer line-up, it seems unlikely the company’s founding family would be willing to sell after it rejected an offer from SABMiller and said it wants to keep the brewer independent, Gorham said.
Diageo’s Guinness brand provides another possibility that would move A-B InBev into the African beer market, where it currently has little presence. That deal may be too small to have a meaningful impact on A-B InBev’s profit, though, and Diageo would also likely demand a hefty premium for that business, should it be willing to sell it at all. The $70 billion company generates about 20 percent of its revenue from beer.
That leaves SABMiller. Andrew Holland of Societe Generale SA says it is “by far the most attractive target” for A-B InBev given its size, position in Africa and the potential cost savings of a deal. Gorham of Morningstar says a deal may cost too much and not be in the best interests of shareholders.
The difference of opinion adds weight to the argument for at least considering some of the other big-deal options A-B InBev has.
“The bottom line is you’re always going to see these guys be extremely entrepreneurial,” Shackleton of Nomura said. “Do they have a case book on Pepsi? I’m sure. Do they have one on Coke? Absolutely. Do they have one on SABMiller? Yeah, of course they do. At the right price, with the right opportunity, everything is of interest.”
By Brooke Sutherland