Last year remained a somewhat troubled year for the leading spirits manufacturer, Diageo, against headwinds in emerging markets. Recently, speculations regarding a potential acquisition surfaced, with private equity firm 3G Capital formulating a bid, against which the stock rallied close to 9% last week. Given that 3G has a major stake in the leading beer company, Anheuser-Busch InBev, the acquisition could imply a potential merger between the two companies. While the merger might hold promise for AB InBev, it may not be as lucrative for Diageo.
- Diageo’s business is predominantly based on spirits, with beer holding a 20% share. While AB InBev could use its expertise to expand Diageo’s beer business, they could have little to contribute to spirits. In this case, combining forces with AB InBev could result in various integration risks, that could outweigh potential cost synergies.
- In case of a merger, AB InBev’s biggest gift to Diageo would be their strong hold over beer in many developed markets such as the U.S. However, the U.S. has been increasingly seeing customers shifting from beer to spirits, with market share for spirits increasing from 34.7% to 35.2% between 2013 and 2014, and that for beer declining from 50% to 47.8% between 2010 and 2014. In this situation, Diageo may not experience as much of a gain from AB InBev’s business in the longer term.
- While AB InBev has a strong hold in many developing markets, they hardly have a presence in markets such as Africa that could see higher beer consumption against growing disposable incomes. Diageo already has a strong hold in the African beer market, with over 70% of revenues coming from Guinness and their control over United National Breweries. Although the African beer market remains under-penetrated by mainstream beers, there might be little scope for premium beers–which AB InBev sells, considering price sensitivity is a major factor in the region.
- Finally, both Diageo and Anheuser-Busch InBev are world leaders in spirits and beer. Furthermore, Diageo’s stout beer brand, Guinness, is the world leader in its category. Given this, a merger between the conglomerates is bound to be scrutinized by regulatory authorities over anti-trust issues. Even if the deal is given clearance, it could involve major divestitures that could diminish Diageo’s prospects for a stronger presence in beer markets in countries such as the U.S.