FYI | Aug 30 2006
Nothing is impossible when it comes to finance, mergers and acquisitions.
This week media stories came flashing by via the Yahoo7 service in our newly launched Cockpit stating Foster’s (FGL) shares were rising because of rumoured corporate interest, possibly from SABMiller.
As I stated in the opening sentence, nothing is impossible in the globalised world of haute finance, but nevertheless I couldn’t help but shake my head and smile.
My mind drifted back to my first year in Australia, a time when respectable newspaper The Australian printed the rumour that Heineken was interested in acquiring Foster’s on its front page. I wasn’t the only one who shook his head back then I learned later on.
Australians have a long held belief that ‘their’ Foster’s is a respected global force in the international beer scene. It is (sort of), but not in the way the Australians see it.
Foster’s may have had all the ambitions and maybe even the tools and opportunities at hand to become what Heineken, InBev and SABMiller have grown into today, but it has also had the misfortune of landing into serious corporate trouble in the nineties, which turned out to be a crucial time for the global beer industry. If my understanding of the company’s history is correct, the matter is best summarised as the John Elliott legacy.
By the time the company was brought back on firm and solid footing again someone somehow must have drawn the conclusion it was too late to join the race for dominance of the international beer market and decided that if things were left as they were there would be low growth and more than likely one or two suitors knocking on the door shortly.
As the dominant player in a beer drinking country that is in essence a duopoly one can easily see the attraction for the three aforementioned corporate beer giants.
The problem with such a scenario is, however, that Foster’s has by now diversified into wine.
We all know it’s better not to mix beer with wine when we’re having a good time at a party (the consequences can be far worse than any older than twenty-something stomach can bear). Unlike Foster’s, and copycat Lion Nathan (LNN), it’s a golden rule that is also adhered to by the rest of the international beer industry.
Foster’s management has managed to sell the ‘beer is low growth’ mantra to its shareholders and investors in Australia. Up to a point that I see the theme sometimes repeated in mainstream news stories. Well done Foster’s!
Unfortunately, it’s not true.
As a younger financial journalist I was fortunate to be invited to a few inhouse management presentations at Heineken’s. At the time, Heineken was the undisputed most internationally blended of all beer brewers in the world. It was also the largest behind Anheuser Bush which was only the number one because the US happened to be the world’s largest beer market. Except for a few US expats with no intention to assimilate, nobody ever drank Budweiser beer. Except the locals in the US.
Heineken, however, was sexy. Especially outside the Dutch borders (though never in Belgium). Judging by the latest beer ads that are available and downloadable on the Heineken website the company still spares no effort to keep sexy-ness linked to its marquee green beer bottles.
Even today, beer is still by large a local phenomenon. Every beer drinking nation has its local favourites and these brands, deeply rooted in the local culture, still sell the highest volumes locally. Heineken, based in Amsterdam, was the first to see the potential to enter the US market. The rest of the world was still defending its home turf until the nineties when a few more players started spreading their wings.
Even today the top five players in the world still only account for circa 40% of total beer volumes sold globally. Having said this, the number is expected to increase rapidly over the next set of years.
Things have changed dramatically since the last time I visited Heineken headquarters. Anheuser Bush is no longer the world’s number one. Heineken is no longer the largest international brewer. Contrary to what I normally read in the local media, Belgian based InBev, probably better known via popular beer brands such as Stella Artois, Hoegaerden and Beck’s Bier, is nowadays the world’s number one. I checked the statistics by volumes sold, market capitalisation and by annual earnings (translated into USD for reasons of comparison) and InBev comes on top in all instances. (I could even add total workforce numbers as a fourth).
Anheuser Bush is not even second anymore, as South African Breweries acquired US competitor Miller a few years ago to form SABMiller which sells more beer worldwide than Anheuser Bush does in the US.
Heineken is but a distant fourth nowadays. Carlsberg “probably the best beer in the world” is fifth.
What these four companies (excluding Anheuser Bush) have in common is that they have successfully expanded beyond their homeland markets. Yes, beer is a single digit grower in most matured markets these days, but all four have outgrown that limitation by going abroad.
Being a major international player these days means you can put “we have more than 150 brands of beer in our portfolio” on your website, or “you can drink our beers in more than 170 countries” (which leads us to an interesting trivia question: how many countries are there?)
Most importantly, however, is that these companies are above all beer brewers. They may sell some water in bottles on the side, or some juice, but they don’t do wine. That’s because wine and beer have different market characteristics such as their prime distribution channels. (It has to be noted though that SABMiller, which nearly controls 100% of the South-African market is also a major bottler of Coke and its various soft drinks in Africa. It has a similarly large soft drinks and juices subsidiary in Latin-America).
All these companies have yet to feel the need to seek future growth outside their prime beer orientations. That’s because they are all busy conquering large regions such as Russia and China. Long before the world woke up to the fact that China would be the world’s largest producer of cement, or the world’s largest consumer of mobile phones, these beer companies had already figured out that China would become the new growth market. The country is already the largest consumer of beer (in volumes sold annually), beating the US by quite a sizeable distance.
In a recent presentation to investors, SABMiller stated it has the ambition to build its main Chinese brand Snow into a national beer brand throughout China. Already the company sells over 15 million liters of Snow beer each year – this is about double the entire Indian annual beer consumption, the presentation highlights.
The growth rate for Snow beer in 2005 was 25%.
If current analyst forecasts prove accurate, the top international beer producers should all deliver double digit EPS growth over the next few years. Both Heineken and Carlsberg have just upgraded their guidance for the current year.
Now ask yourself would you be looking to acquire Foster’s?
My best guess is that everything will attract a buyer at the right price. But in the case of Foster’s, and under the current circumstances at this point in time, any international beer brewer who happens to see an opportunity to acquire Australia’s largest beer brewer on the cheap is bound to bring along an agreement with a large wine player to offload half of the business.
I bet you management teams in Amsterdam, Leuven, Copenhagen and Johannesburg have all drawn the same conclusion from the last Foster’s results: better to stick with what we know best.
Till next week!
Your I think I’ve written myself in a thirsty mood this time editor,
Rudi Filapek-Vandyck
(as always supported by the Merry Four)