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Could the AB InBev-SABMiller deal leave Diageo unscathed?

November 3, 2015
Food & Drink

In September of this year, the talks of a major deal in the beer space came forward. Once again, world leader, Anheuser-Busch InBev , had set forth to bid for second in line, SABMiller.

As per the latest update, AB InBev is offering £44 (or ~$67) per SABMiller share. In addition to this, they will be drafting separate conditions for SABMiller’s largest shareholders, Altria and BevCo, who collectively own 41% of the company. Although the deal is in its inchoate phases, a combination involving the world no.1 and no.2 in the beer space, is bound to exert a major impact – not only on the merging entities, but even other players involved. One of these could be Diageo, who is the proud owner of beer brands such as Guinness and Kilkenny. However, in spite of the magnitude of this deal and the implications it could have for the beer industry at large, a number of factors suggest that Diageo ’s business may just go unscathed by this move.

– One of the biggest factors that an AB InBev-SABMiller combination is bound to enjoy is synergies in terms of production, distribution, and marketing. Against these synergies, the combination could choose to offer more competitive prices to gain share points in key markets, or in general reap higher profits against cost savings when economies of scale kick in. Now, if the combination does choose to pursue the former strategy, then players in the beer space could have reason to worry particularly in developing markets where price is a key consideration governing purchasing decisions. However, these advantages that the AB InBev-SABMiller combination could enjoy may not be a major problem for Diageo. Part of this is solely because Diageo is, after all, a spirits maker and not a brewer. In that, Diageo boasts a stellar portfolio, which includes brands such as Johnnie Walker, Smirnoff, Baileys, and Don Julio. According to a prior annual report of Diageo, beer accounts for a little over 20% of Diageo’s net sales. In this case, Diageo has alternatives to steer revenue growth, even if the global beer industry at large stands at the threat of losing out to the synergies that an AB InBev-SABMiller merger could have.

– Second, one of the biggest assets that a SABMiller takeover could present AB InBev, is access to lucrative emerging markets across Africa, where AB InBev has little presence. SABMiller, with its cross-shareholding in the Castel group, has a footprint that ranges across 35 African countries, happens to be the market leader in the region. By combining forces with AB InBev, the combination could intensify price competitiveness in the region by passing on cost savings to customers. This, in turn, could hamper share expansions for other brewers especially when price sensitivity is high. However, could this have a major impact on Diageo? Probably not. For one, Diageo’s Guinness is the leading stout beer in the world, and it makes up almost 50% of all the beer sold in Africa. When one brand has such a major following in a region, it might be harder to break people’s preferences solely based on price. Furthermore, Africa accounts for ~13% of Diageo’s net sales. Clearly, in this sense, any market share loss in Africa may not be significant enough to exert a major impact on the company’s overall performance. What may be of relevance are developments in regions such as North America, Europe, and Asia Pacific, which could, in fact, hamper Diageo’s future prospects since a large majority of the company’s revenues come from these areas. However, firstly, while an AB InBev-SABMiller combination could have a sweeping advantage in countries like the U.S. or China, the advantage noticed at this point may hardly remain after regulatory authorities scrutinize the deal for anti-trust issues. Furthermore, even in these areas, beer is just a part of Diageo’s business, in which case the resulting impact may not even be significant.

– Last, but not the least, when the world’s leader and second in line combine forces, it would definitely intensify the degree of consolidation in the global beer industry. In this case, Diageo may just find itself at an advantage, particularly in terms of pricing. Since the number of competitors in the industry would be reduced, Diageo could command a higher degree of pricing power in the market, which could, in fact, benefit the company in terms of revenues and margin expansion.

In conclusion, the actualization of the AB InBev-SABMiller deal could have a major impact on the global beer industry. However, Diageo’s business may not really be significantly impacted by this deal.

Trefis has a $115 price estimate for Diageo, which is above the current market price.

Source: Forbes

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