Fitch Skeptical of InBev-Anheuser Merger Prospect

by: Research Recap

Fitch Ratings is skeptical about major beer company mergers in a timely report on the global beer industry. FT Alphaville reports that Belgium’s InBev (INBVF.PK) is preparing a bid for Anheuser Busch (NYSE:BUD).

Fitch argues that “although a merger between AB and InBev would address AB’s limited international portfolio, the current global players may prefer to capture regional expansion opportunities that are still available before they embark on any industry‐ transforming merger of peers.”

Fitch’s Special Report finds that the global brewing industry “is at an intermediate stage of consolidation and that InBev and SABMiller ( are two of the four global brewing players that have the financial flexibility to continue to drive sector consolidation forward.”

While Heineken (HINKY.PK) and Carlsberg (CGBWF.PK) have reduced their financial flexibility following the recent and joint acquisition of Scottish & Newcastle (S&N), InBev and SABMiller have low to moderate leverage and good cash flow generation that would allow them to pursue larger targets. “Although US-based Anheuser Busch has not been actively pursuing international acquisitions, it has the financial flexibility to do so. It would, however, have to reduce its large share buyback programme.”

With specific regard to the combination of AB with InBev which has been rumored for some time, Fitch notes that the large price that InBev would have to shoulder for a cash acquisition of AB — which currently has a market cap of $36 billion —might make a hostile takeover, though not impossible, more difficult to fund.

“Conversely, AB’s management team, historically led by the founding Busch family, may rightly argue that it can afford to remain independent for the moment, and thus refrain from cooperating with a merger with InBev. US‐based AB has the ability, in Fitch’s opinion, to deliver satisfactory profit growth.”

Fitch said it believes that in western Europe as many as eight to ten companies that remain independent could come up for sale as rising raw material prices and weaker consumer spending put pressure on their sales volumes and profitability. While central-eastern Europe is almost fully consolidated by international players and companies in Latin America are unlikely to come up for sale in the short- to medium-term, Asia is a promising and still fairly unexplored territory for international players. While demand for beer is mature in North America and most of western Europe, it continues to grow in emerging markets.

Overall, Fitch believes the brewing industry is at a more intermediate stage in its consolidation compared, for example, to the tobacco sector before it entered its latest round of consolidation in 2006/2007. The report argues that global brewers may prefer to postpone embarking on any industry-transforming merger and acquisition activity until they have built up further critical mass.

The report “Global Beer Industry - Consolidation and Peer Comparison” includes an extensive analysis of the trading environment in each region and discusses the position of key players as well as the scope for regional consolidation.