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AB InBev’s Deal Thirst Can Be Satisfied With Pepsi: Real M&A
2014-10-12 22:00:01.1 GMT


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By Brooke Sutherland
Oct. 13 (Bloomberg) -- If Anheuser-Busch InBev NV 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, SABMiller Plc. A company
of AB InBev’s size and ambitions has other options though,
including PepsiCo Inc.
AB 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. AB 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, AB InBev probably won’t
walk away empty-handed.
The culture of AB 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.”

Too ‘Boring’

Representatives for Leuven, Belgium-based AB InBev,
Purchase, New York-based PepsiCo and London-based SABMiller
declined to comment. Representatives for Corona, California-
based Monster Beverage and Waterbury, Vermont-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.”
AB 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.

Cost Benefits

One driver for a takeover would be the potential cost and
revenue benefits of selling beer and soft drinks through the
same distribution system. AB 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 AB InBev and serve on its board.
“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.”

Snacks Sale

Should AB 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
AB 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.

Deal Scenario

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 AB 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.

Monster, Keurig

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 AB 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 AB 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.”

Beer Options

While a Heineken NV takeover would add another strong brand
to AB 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 Plc’s Guinness brand provides another possibility
that would move AB InBev into the African beer market, where it
currently has little presence. That deal may be too small to
have a meaningful impact on AB 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.

SABMiller

That leaves SABMiller. Andrew Holland of Societe Generale
SA says it is “by far the most attractive target” for AB 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 AB 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.”

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--With assistance from Matthew Boyle in London, Jeffrey
McCracken in New York and Duane D. Stanford in Atlanta.

To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Elizabeth Wollman