In our June 30 note, "We Are Sceptical on a Potentially Disruptive AB InBev-SABMiller Merger," we laid out the strategic and valuation reasons we are sceptical that a megamerger involving the two largest brewers in the world would add value to Anheuser-Busch InBev (ABI) shareholders. If such a transaction does occur, we would regard it as a net negative for second-tier brewers Heineken and Carlsberg, as well as peripheral players such as Molson Coors and Diageo, because we think a combination with SABMiller (SAB) would extend ABI's cost advantage by increasing its purchasing power. However, material consolidation would occur in only a limited number of geographies, and there may be opportunities for competitors to acquire pieces of the combined business.
The greatest threat that a combined AB InBev-SABMiller would pose to competitors is an increased cost advantage through greater procurement scale. Adjusted for the Oriental Brewery acquisition, ABI-SAB would have sold 753 million hectolitres of beverages in 2013, more than triple the 195 million hectolitres of total beverages sold by second-place Heineken. In its current form, ABI already acquires around 15% of the annual U.S. rice harvest, and this scale would give the combined firm even greater power over its suppliers. By increasing its central procurement to 80% from 50% currently, the combined entity could save $125 million in cost of goods sold, or 1% of operating costs, by our estimates. ABI-SAB could allow the incremental cost advantage to flow to the bottom line, or it could leverage it to grow organically in low-price-point markets such as Africa.
The geographic overlap between AB InBev and SABMiller is fairly limited, and we believe most of the assets that ABI-SAB would be forced to sell are held in the form of joint ventures, and so have natural acquirers. In the top 10 global beer markets, we believe there will only be antitrust issues in the United States, China, and possibly India. In the U.S., we would expect Molson Coors to acquire SAB's 58% stake in the MillerCoors joint venture.
We estimate that at 11 times 2014 enterprise value/EBITDA, a multiple that represents the midpoint of similar-size historical mature market deals, the sale could fetch $3 billion. At a multiple at or below this level, we believe the deal would be likely to add value to Molson Coors because we estimate that a possible $300 million, or 2% of operating expenses, could be eliminated by fully consolidating the joint venture into Molson Coors.
Similarly, China Resources Enterprise would be the obvious buyer of SABMiller's 49% ownership of China Resources Snow Breweries. We estimate a reasonable valuation for CR Snow would be 16 times EV/EBITDA, reflecting its double-digit volume compound annual growth rate over the past five years as the joint venture has gained share from 17.8% in 2008 to 23.5% in 2013 in an industry growing at 4% per year. At that valuation, we estimate a sale of CR Snow could contribute $1.3 billion in cash toward the purchase price of SABMiller.
In India and Eastern Europe, however, we see more opportunities for the second-tier brewers to acquire pieces of the business. SABMiller is the number-two player in India, and its Haywards brand held 15.7% share in 2013. ABI is a much smaller player, but it goes to market in India with Budweiser.
We expect the firm to retain control of that brand, and that in the event of being required to sell other labels, the combined ABI-SAB entity would probably dispose of some of SAB's smaller brands in India such as Royal Challenge Premium Lager (less than 1% share) and potentially Foster's (1.4%). We believe Heineken, given its under-indexing in a region that offers one of the most attractive growth opportunities for its namesake brand, or Diageo, having just consolidated United Spirits and with an opportunity to expand Guinness to a fast-growth market, would be the most likely acquirers of these assets.
In Eastern Europe, we believe Carlsberg may be able to pick up some brands. In Poland, a combined ABI-SAB entity would hold a market share of around 54%, and in Romania, 39%. Given that ABI did not make a move for Starbev in 2012, when it was acquired by Molson Coors, we do not believe that Eastern Europe is a priority market for ABI in the near term.
We think ABI may make disposals in the region to raise cash for the acquisition and to address antitrust issues. Carlsberg is the number-one or -two player in Russia, Ukraine, Belarus, Kazakhstan, and Azerbaijan and is probably best-positioned to extract value from further acquisitions in the region.
We do not believe that further consolidation through brand acquisition in small geographies would offset the sharpening cost disadvantage that second-tier brewers would be faced with in the event of an ABI-SAB megamerger, but we do think it will be an important strategy going forward. The global brewing industry is still fairly fragmented, even absent any disposals, an ABI-SAB entity would hold a global share of only around 34%, and to keep pace with a potential 500-pound gorilla, Heineken and Carlsberg would have to grow through acquisition to fill in their geographic portfolio gaps.
