Although you couldn't tell from the tame (read: lame) commercials during this year's Super Bowl, the global beer industry is packed with fun and excitement. And I'm not talking about just the mudslinging and cry-babying between the two U.S. market leaders, Anheuser-Busch (NYSE: BUD) and SABMiller. No, the industry's real story is the consolidation wave sweeping the world and the effect it's having on industry leader Anheuser-Busch.
The trend, which really started with Altria's (NYSE: MO) sale of Miller Brewing to South African Breweries a few years back, comes as no surprise considering the industry's slow growth prospects. Big brewers are looking to Asia and South America, as well as each other, to stimulate growth that's simply not going to come organically.
The most important deal of 2004 was Interbrew's purchase of Brazilian brewer Ambev, in a deal creating the world's largest brewer by volume -- Interbrew Ambev. So far, 2005's most significant deal, closed last week, is the acquisition of Canadian brewer Molson by Coors Brewing, combining two old family businesses to create the world's fifth-largest beer maker, Molson Coors (NYSE: TAP).
What a difference a year has made for Anheuser-Busch. This time last year, the King was comfortably on top of the beverage industry, with dominant global market share. Now, it no longer brews the most beer in the world, and the competition is getting bigger and stronger every day. Are the King's glory days behind it?
It's still way too early to tell, and I doubt that the folks in St. Louis are panicking, but the company's fourth-quarter and full-year results depict a company struggling to maintain its lead. Domestic volume was down 1.5% in the fourth quarter and barely budged for the full year; domestic market share dropped from 49.7% to 49.6% on the year. Domestic gross margins took a dip in the fourth quarter, and overall gross margin was off for the full year. International results were the King's saving grace in 2004, where production jumped nearly 65% to 13.8 million barrels, boosted by last year's acquisition of China's Harbin Brewery.
Global consolidation will continue, and the big concern for Anheuser-Busch is how to finance must-have acquisitions. Share repurchases -- something I called attention to last year -- again pumped up earnings per share in 2004. The company used nearly all of its free cash flow to repurchase equity, a trend that will continue if the company wants to hit its estimated 6%-9% EPS growth for 2005. Significant new debt isn't much of an option, with the current debt balance more than three times equity. If Anheuser-Busch is going to "out-deal" the competition, it has to use the free cash currently allocated to share repurchases or else reissue some of those treasury shares. Either approach will hurt EPS growth, and unsuspecting investors, over the next few years.
Fool contributor Chris Mallon owns shares of Anheuser-Busch and Altria through his private investment partnership. For more, check out the Fool's Anheuser-Busch, Altria, and Adolph Coors discussion boards.
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