While Anheuser-Busch InBev (NYSE:BUD) and SABMiller (NASDAQOTH:SBMRY) have agreed in principle to a merger of the two companies, a formal offer has yet to be extended and accepted because the nitty-gritty details of which assets to keep and divest to pass regulatory muster still need to be settled.
A frothy market
When A-B bought Mexico's Grupo Modelo two years ago for $20 billion, it became a complicated three-way transaction that saw Constellation Brands brought into the loop to satisfy regulators, who were concerned about Bud's near-complete ownership of the U.S. beer market.
To meet their objections, A-B agreed to sell to Constellation the 50% ownership of Corona importer Crown Imports that Constellation didn't already own (it and Modelo had formed Crown as a joint venture), a Modelo brewery, and perpetual distribution rights to make and distribute Modelo brands in the U.S.
The A-B purchase of Miller is orders of magnitude bigger. The deal is estimated to be more than five times larger, or $108 billion, one that would create an industry leviathan worth some $250 billion, have annual revenues of around $64 billion, and control of some 70% of the U.S. beer market.
Even on a global basis, the two would own more than 30% of the market, which is more reasonable, but it would place the next biggest brewer, Heineken (NASDAQOTH:HEINY), far behind with just a 9% share. That suggests the transaction is going to receive a fair amount of scrutiny on foreign soil before getting the green light.
So what assets might Anheuser-Busch and Miller shed?
Riding the silver bullet train
Miller's 58% stake in MillerCoors, its joint venture with Molson Coors (NYSE:TAP), is the most obvious to be shed. Molson, which is the world's seventh-largest brewer by volume, owns 42%, but has the right to increase that stake to 50% if Miller is acquired as well as the right to make a first and last bid for it.
That certainly makes Molson the logical buyer of the other half of the venture, which owns 26% of the U.S. market, and The Wall Street Journal has reported A-B and Miller are trying to hash out a side deal for the joint venture before making any concrete merger announcement.
While Molson has expressed interest previously in acquiring the rest of the brewer, Heineken is also a contender and can't be ruled out. It is the fourth-biggest beer company, with a 4% share, and would find a larger presence in the U.S. attractive.
A consolation prize of sorts for Heineken could also be Miller's African assets, where the brewer got its start as South African Breweries. Heineken's market share on the continent has been weakening, and this past summer spirits distributor Diageo terminated its business alliance with the brewer in South Africa.
However, Anheuser-Busch has little presence on the continent and may want to use those assets itself. But with the beer industry there much more mature, it might prefer to concentrate its efforts elsewhere, such as in the growing Latin American market.
All aboard the Orient Express
Another of Miller's assets likely on the chopping block is its 49% stake in Chinese brewer CR Snow, the country's top-selling beer with a better than 20% share of the market and the biggest beer in the world. Its partner there, China Resources Enterprise, would be the likely buyer for that asset. There's little overlap between A-B and Miller in the rest of the world.
There would still be other niggling details that could prove to be an impediment to the merger. For example, Anheuser-Busch has recently taken flak from craft brewers who accuse it of buying up distributors as a way of limiting their shelf space in favor of its own "crafty" brands. The Department of Justice has launched an investigation into the brewer's acquisition of five distributors in three states over the past few months.
Coupled with regulators who were already leery of allowing A-B and InBev to merge because of fears it would limit competition and raise prices for consumers, a deal to combine the two biggest brewers faces some very high hurdles to overcome. That suggests that if the deal were to be approved, some key assets will first need to be stripped away.