SABMiller and Molson Coors (NYSE: TAP ) are about to brew up some frothy merger activity. The combined company, to be called MillerCoors, will control approximately 30% of its market and should pose a serious threat to rival Anheuser-Busch (NYSE: BUD ) . It will have about $6.6 billion in combined revenues, with a barrel full of popular brands including Coors Light and Miller Lite.
With trends in the U.S. beer market becoming watered down, this is a good time for such a merger. The joint venture that will consolidate the two companies' domestic operations will provide cost-efficient opportunities, and MillerCoors hopes to save as much as $500 million annually by the third year of the merger. The merger should also give the combined company leverage when purchasing commodities such as aluminum and grains, and when negotiating for advertisements.
Currently, Anheuser-Busch, the maker of Budweiser, controls nearly half of the U.S. beer market, and it knows how to use its marketing muscle and its distribution power to push its products into the meaty hands of beer drinkers everywhere. The amount that TNS Media Intelligence reports that Anheuser spends on advertising in the U.S. is more than what SABMiller and Molson Coors spend combined. Anheuser has even locked up access to Super Bowl advertising: It's the only brewer or alcoholic-beverage maker that can advertise during the game through 2012.
Anheuser doesn't have much of an international presence, though. It does own 50% of Grupo Modelo, the maker of Corona, which is Mexico's top-selling beer. In addition, Anheuser signed on Dutch brewer Grolsch last year, produces Japan's Kirin beer here in the U.S., and owns a 27% stake in China's Tsingtao Brewery. But still, for all of that activity, the King of Beers might more properly be called just the King of U.S. Beers.
That's because SABMiller is already the world's second-largest brewer, behind InBev, and both SABMiller and InBev have been using their international presence to grow, particularly in Latin America. SABMiller credits sales south of the border with pushing its overall growth up by 11% in the five months ended in August.
Meanwhile, the U.S. beer market, which totals about $94 billion, grew only 2% last year, as measured by the number of barrels produced annually. The market's expected to rise just 1.5% this year, which will make the rivalry between the brewers to capture consumers' dollars all the more intense.
Some pundits have said that a pairing of Anheuser with InBev might be the next necessary step for the American brewer. It would indeed be a logical pairing, considering that both companies have a partnership agreement that imports European brands such as Stella Artois and Becks. Yet Anheuser might want to ensure that any merger would be a true merger of equals. SABMiller, for example, is contributing 58% of the assets to the deal with Molson Coors, but it's getting only 50% of the control.
However, if Anheuser does decide to continue concentrating primarily on the U.S. market, there wouldn't be a need to look for a partner and cede any control to it. With profit margins in excess of 23%, it is more than twice as profitable as either SABMiller or Molson Coors. The MillerCoors deal was done from a position of weakness, and although the companies should realize some savings, the merger might not end up meaning much in the hierarchy of beer royalty.
For more alcoholic enjoyment:
RSS Headlines
Fool UK