Expert comment: Can the AB InBev, SAB Miller merger buck the trend of destroying value?

As the AB InBev and SAB Miller merger is finally agreed, John Colley, Professor of Practice at and an expert on large-scale mergers, discusses what the deal and subsequent selling of MillerCoors means for the industry.”In view of the size and scale of AB InBev post the SAB Miller deal, there is likely to be further consolidation amongst the remaining players. This is a trend in the pharmaceuticals industry, where valuations are increasing as the industry rapidly consolidates. Size is necessary to compete on cost grounds and distribution grounds. Maintaining product availability through distribution requires sizeable advertising budgets in order to compete with the big brands. Molson Coors may not be independent for long. “For shareholders $106Bn is a steep price. Cost savings are estimated at $1.4Bn or seven per cent of sales. This is a figure well below expectations suggesting that pricing and distribution benefits may be the real driver of the deal. Forced sales such as the shareholding in MillerCoors through competition authority pressures with others to follow, possibly in China, Latin America and Europe, means lost value to shareholders. Further concessions may also be required in the USA. At what point does this become value destroying? Research shows most acquisitions result in destroying value rather than creating it. Will this deal buck the trend? “Big brand brewing is highly profitable due to scale and scope economies related to the size of the main players. However it is their stranglehold on distribution through bars, restaurants, supermarkets and entertainment venues which prevents effective competition. The power of advertising together with product availability is highly potent – just ask Coca Cola. A glance at AB InBev’s results shows that big brands are continuing to make ground further limiting competition. Beer markets are declining in many countries. This is partly through the move to craft beers, together with increasing popularity of wines and spirits.”It is rare that the number one player in an industry buys the number two player, creating a worldwide market share of almost 30 per cent in a consumer market. The global brewing industry is already concentrated, with the top five (soon to be four) sharing almost 50 per cent of the market.”Research shows that less competitors in an industry, and specifically the brewing industry, results in higher profits and consequently less consumer choice. This merger is likely to further restrict consumer choice. It will also limit price competition in an industry which already demonstrates stratospheric levels of profitability. AB InBev has Earnings before tax, depreciation and interest (EBITDA) of around 40 per cent. The beer consumers’ hope is the growth of craft beers. These are rapidly multiplying and have a significant share in pub sales.”