Coverage: A beer conglomerate is brewing

The battle for being the king of beers (although mostly cheap, mass-produced ones) is apparently heating up. Some analysts are unsure if the rumored sale will be allowed to go through, while others predict more consolidation in the industry.

Shayndi Raice, Peter Evans and Matthew Dalton had this story for The Wall Street Journal:

Anheuser-Busch InBev NV is talking to banks about financing a potential megadeal, perhaps reaching £75 billion ($122 billion), to buy global beer rival SABMiller PLC, according to a person familiar with the matter.

A tie-up between the world’s two largest brewing companies has been rumored for years, but a revival in global merger activity this year has sparked renewed speculation about a deal.

AB InBev isn’t in active discussions with SABMiller, said the person, explaining the company is waiting to line up its financing before making a formal approach.

The purchase price of SABMiller would far surpass InBev’s $52 billion acquisition of Anheuser-Busch in 2008, the largest deal in the sector.

The talks about financing follow SABMiller’s overture to buy Dutch brewer Heineken NV, an offer that Heineken said Sunday it had rejected. The U.K. brewer hasn’t been discouraged by Heineken’s initial rejection and would consider another bid, according to another person familiar with the discussions.

Bloomberg’s David Welch, Matthew Campbell and Manuel Baigorri reported that a deal with Heineken would have helped SAB remain independent:

Heineken, the brewer of Amstel Light, confirmed in a statement that it turned down the offer and said it intends to remain independent. SABMiller’s preliminary approach was rejected by the family that controls Heineken, Bloomberg News reported yesterday, citing people who asked not to be identified because the information is private. The offer, made in the last two weeks, would have made the family one of the combined company’s largest holders, one of the people said.

Shares of Heineken rose as much as 4.3 percent to 61.98 euros in Amsterdam, the highest since December 1998. Heineken family members are resistant to any sale because they want to keep control of the 35 billion-euro ($45 billion) brewer, the people said. SABMiller, long the subject of speculation regarding a takeover by AB InBev, is assessing its next move, the person added, and it’s not clear if it will approach the family again. SAB shares gained 6.2 percent to 3,617 pence at 8:05 a.m. in London, the most in nearly two years.

“For SAB, a way of preserving their independence is to buy Heineken,” said Matthew Beesley, portfolio manager and head of global equities for London-based Henderson Global Investors Ltd. “It’s easy to underestimate the desire for management teams to be in control of their own destiny rather than to sell their business at a very high price.”

Despite his distaste for cheap American beer, Slate’s Jordan Weissmann wrote that a deal with unlikely due to concerns about a monopoly:

AB InBev owns Budweiser, while SABMiller produces Miller (as well as Milwaukee’s Best, Keystone Ice, Leinenkugel, and more). It would be bad for American consumers if the two companies were allowed to combine their stateside operations, but chances are that won’t happen thanks to antitrust concerns. When AB InBev purchased Corona-maker Grupo Modelo last year, the Justice Department forced it to spin off a new brewer that would produce all of the Mexican beer titan’s brands in the U.S., thus preserving domestic competition. Something similar might happen in the event that AB InBev gobbles up SABMiller.

As of now, SABMiller’s brands are brewed and sold in the U.S. by MillerCoors, a company it co-owns with Molson Coors, maker of Coors and Coors Light. The two created the joint venture in 2007 in order to better compete with Anheuser-Busch; today, it controls about 27 percent of the American market, according to data fromBeer Marketer’s Insights, versus AB InBev’s 45.6 percent share. Should AB InBev manage to buy SABMiller, it will likely have to sell off MillerCoors to placate regulators.

So in short, even if this monster merger were to happen, there will probably still be plenty of competition among makers of mass-market American swill.

But The New York Times reported in a story by David Gelles and Stephanie Strom that there still might be room for deals, despite regulator’s worries:

“There is definitely room for more megadeals,” said Marc Levit of the Demeter Group, an advisory firm that focuses on the beverages industry. “It makes a lot of sense for those looking for international growth, and inevitably will happen.”

The next round of beer deals may not be as easy as the last one. After decades of consolidation, there are myriad obstacles facing brewers that want to expand through megadeals.

Regulators are wary of big companies getting bigger. Anheuser currently controls about 21 percent of the global beer market share. Were SABMiller to acquire Heineken, it too would command about 21 percent. And most of the remaining targets, like Heineken, are controlled by families that appear reluctant to sell.

In spite of these challenges, however, analysts believe both Anheuser and SABMiller will try to forge ahead with deals in the months and years ahead.

“With interest rates at historical lows and slowing organic growth trends in many markets, we believe the conditions are ripe for an increase in M.&A.,” Simon Hales, a beverage analyst with Barclays, said of the beer industry in a note this summer.

And really, does it matter who is producing cheap beer? It’s hard to tell the difference and as long as the consolidation doesn’t lead to arbitrarily high prices, then it should not matter where all the profits are going. But given the current laws, it does seem unlikely that one company would be allowed to control all those brands.