In recent months, rumours have been widely reported that Anheuser-Busch InBev (ABI), the world's largest beer maker, is interested in acquiring SABMiller (SAB), the world’s second largest. Proponents of the deal point to cost synergies, the per capita consumption opportunity in SAB's markets, and the margin differential in Latin America between SABMiller (mid-20s EBIT margins) and Ambev (high 40s).
We largely agree on the cost synergies and believe ABI's economic moat would be enhanced by a deal through a deeper cost advantage. However, we think the relative lack of affordability of beer in SABMiller's Latin American markets will prevent consumption growth from reaching the level of Ambev's markets for several years. Furthermore, with the market appearing to price in a takeout, we doubt that ABI could acquire SAB at a value-creating price.
If Anheuser-Busch InBev did buy SABMiller, it would acquire an attractive asset in Africa, in our opinion, a market in which the world's largest brewer has yet to build a meaningful presence. In its domestic market of South Africa, SABMiller's first-mover advantage allows it to manufacture and distribute at a lower cost base than competitors, which in turn allows it to offer products at lower price points. In a market where around 75% of alcohol consumption is brewed at home, we believe this structural cost advantage—the source of SABMiller's economic moat—puts the firm in pole position to exploit the long-term trend of the movement of consumers into branded consumer products in Africa. If ABI and SAB were to merge, we believe this would extend ABI's cost advantage from Latin America to Africa and create a formidable global brewer.
Premium members can read Morningstar’s full analysis of SABMiller here and of Anheuser-Busch Inbev here.
