After several deadline extensions to hammer out a side deal, Anheuser-Busch InBev (NYSE:BUD) and SABMiller (NASDAQOTH:SBMRY) have reached a merger agreement that will see the No. 1 and No. 2 brewers combine to form a massive global beer company that will generate about $64 billion annually in revenues and account for almost 30% of all the beer consumed in the world.
But a deal this size is going to undergo intense regulatory scrutiny, and even if it does pass muster, will probably be changed before the end.
One problem at a time
Anheuser-Busch and Miller obviously saw North America as the biggest hurdle to get over, as they're the top two brewers in the region, controlling 70% of the market. To ease fears over market dominance, they crafted a side deal to sell to Molson Coors (NYSE:TAP) the 58% stake in the MillerCoors joint venture it doesn't already own. Molson has agreed to pay $12 billion for the global rights to the Miller brand that will launch it into the No. 2 spot, with about a 25% market share.
Some analysts think the deal has been structured in such a way that it ought to be able to surmount antitrust concerns. Euromonitor International, for example, says that because there is little overlap in the markets they serve, it should eventually get the nod. But because it does create such an industry giant, it may just be too big to pass.
In particular, the merger could run into opposition in these three areas:
- China. Miller has a 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 brewer in the world by volume.
- South Africa. Miller got it's start in the region as South African Breweries and it still dominates the market with a third share. Two unions have already expressed concern about what the merger would mean for jobs.
- Latin America. Anheuser-Busch already owns about two-thirds of the Brazilian beer market and it would have a similar share of the market throughout the region.
There's also the impact it would have on craft beers, as the growing industry has already registered complaints about Anheuser-Busch's acquisition of a number of distributors that threatens to squeeze them off store shelves. The Justice Dept. is investigating the claims.
Additionally, the merger also consolidates the bottling operations of the two biggest soda makers under one roof. Miller is a key bottler for Coca-Cola (NYSE:KO) and Anheuser-Busch is an important one for PepsiCo (NASDAQ:PEP).
There may be a lot more changes to come before this deal ever sees the light of day. For example, when Anheuser-Busch acquired Mexican brewer Grupo Modelo for $20 billion in 2013, the two had hammered out an agreement ahead of time to sell off certain assets but were still sued by the Justice Department and required to make additional changes. U.S. distribution rights to Modelo's Corona beer had to be sold to Constellation Brands (NYSE:STZ) for $2.9 billion to satisfy concerns.
U.S. regulators have taken a harder stance against such overbearing combinations, such as blocking Comcast's acquisition of Time Warner Cable earlier this year. Previously they opposed Sprint's merger with T-Mobile and they may block the merger of oil services giants Halliburton and Baker Hughes later this month.
Plus, the deal is going to be scrutinized in many other countries as well, including in Australia and Europe. By creating this brewing leviathan, it will dwarf the next largest player, Heineken, which has just a 10% global share.
With so many fingers in the pie, and the potential to wreak havoc in so many markets because of the combined brewer's dominance, an Anheuser-Busch InBev merger with SABMiller may just be too big to get approved.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton and PepsiCo. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.