The rise and sudden demise of SABMiller

This article is part-2 of a two-part story we first published on Wednesday chronicling the events leading up to the takeover of SABMiller by AB InBev. The original story first appeared in the Financial Mail, a South African publication and authored by Ann Crotty. We give credits to the author and the team at Financial Mail.

The SA Breweries you knew and loved, which listed on the JSE back in 1897, is no more. After Anheuser-Busch InBev’s $109bn takeover last month, apprehension is stalking the corridors of the SA beer icon. But for new boss Carlos Brito, the numbers will trump all.

A month ago Ricardo Tadeu, the tall Brazilian tasked with leading the 125-year-old SA Breweries after its takeover by Anheuser-Busch InBev (AB InBev), stood up in the brewer’s Sandton office to address jittery employees.

As usual, Tadeu was dressed casually in jeans (he almost never wears a tie). But the atmosphere was tense and the volley of questions he faced was predictable.

“Most people wanted to know whether they’d be losing their jobs,” says one person who was there. “They all knew AB InBev’s reputation for cutting costs so they wanted to know whether they had a future.”

The fear was understandable.

AB InBev, the company headquartered in Belgium but controlled by the tight-fisted Brazilian private equity company 3G Capital, is notorious for taking over companies then slashing costs, staff and benefits. Fears were especially piqued since AB InBev had already said it planned to cut 3% of its workforce — 5,500 staff — to save US$1.4bn after the deal.

Its reputation for frugality preceded it. Carlos Brito, AB InBev’s CEO, once boasted that “we all stay in the same place, we all travel the same class — strip down all the status symbols.”

Addressing students last year, he said: “We don’t have corporate jets. I don’t have an office. I share my table with my vice-presidents.”

Even having fun, it seems, isn’t especially encouraged.

By contrast, SABMiller has a corporate jet and its staff were given a monthly beer quota to take home (the sort of benefit that Brito ended at Anheuser-Busch).

The stage was set for a culture clash.

Though he’d only been in SA for a few days, the languid Tadeu (40) was unfazed — as you’d expect from someone with a master’s in law from Harvard.

He spoke reassuringly of how AB InBev had bought SABMiller (and its African operations) precisely because of its growth prospects. It wasn’t about slashing costs, he said. It was about improving processes — not reducing staff to sweatshop workers.

AB InBev on the acquisition trail

anheuser-busch-timeline
It wasn’t about replacing SAB’s iconic brands (Castle, Black Label, Hansa, Peroni) with those of AB InBev (Budweiser, Corona, Stella Artois); it was about giving each more space to grow, at home and further afield.

Besides, the competition commission had imposed conditions before green-lighting the purchase — among them, that the total number of staff in SA could not be cut in the first five years. This doesn’t mean, of course, that everyone will stay. Expect SAB’s staff to be composed of fewer managers than in the past; more blue-collar, lower-paid workers.

Staff will be wondering how they’re going to survive the new culture, which includes Brito’s gruelling zero-based budgeting discipline (which means every cost, including pens, has to be justified afresh).

“Those (SAB staff) who don’t perform to tougher, more exacting standards will come under pressure and may opt to leave. They’re in for a cultural sea-change,” warned another who has studied Brito’s tactics.

This warning is difficult for South Africans to comprehend, given SAB’s reputation as a tough employer with exacting standards.

But as Trevor Stirling, analyst with Bernstein Research, says: “Both cultures are very performance-orientated but the AB InBev culture is somewhat more numbers-orientated, much leaner and directionally more unforgiving.”

SABMiller’s decentralised management structure, which helped extend its reach globally, will offer cost-saving potential.

For Brito, the numbers will be all-important — and the fact that InBev’s operating margins are about five percentage points better than SABMiller’s will be instrumental.

Either way, the SA Breweries you knew — the one supposedly founded by Charles Glass in 1894 (his wife Lisa was the actual brewer), and the first industrial share to be listed on the JSE, in 1897 — is no more.

Instead, a new company, likely to be moulded in the uncompromising style of its new masters, will take its place.

So how did we get here?

SABMiller’s story is one with larger-than-life characters who dominated the business pages for decades, encapsulated in tales of derring-do. It is a tale of a local icon that made good on the international stage.

With the formal takeover on October 10, it came to a frothy end. For the first time in 119 years, reference to SA Breweries was extinguished from the JSE. In its place investors see the name AB InBev: its reward for clinching the third-largest corporate deal yet, worth $109bn (R1.5 trillion).

The rise and disappearance of an SA giant

sabmiller-timeline

It seemed too sudden. It was as if the author had tired of his story and scribbled “The end” midway through a sentence. There was no great final chapter; no fight-to-the-death battle, no bold attempt to fend off the challenger. Instead, SAB ran up the white flag and pocketed the £73bn cheque.

As the authors of the just-released book The Beer Monopoly point out, it was the most profitable sale in brewing history.

Was this the end-game that Graham Mackay and his two co-conspirators, Meyer Kahn and Malcolm Wyman, envisaged in the mid-1990s as they sketched out a plan to deal with the consolidation of the beer industry? Had 17 years of being listed in London and their thirst for global brewing lebensraum been distilled into the mundane matter of maximising an exit price?

Speaking to the Financial Mail, the exuberant Kahn sounds every bit as indomitable as he did 30 years ago when he led the SA beer monopoly. It is a term he always railed against, thundering: “How many times must I remind you: temporary sole supplier.”

Kahn, now 76, says none of them had any idea it would end like this. “This is not what we planned, not at all. Had we managed to get Mexico, things might have turned out very differently,” he says.

That deal in 2012 meant SABMiller lost out to Heineken in the battle to buy Femsa’s beer assets. Had it worked out, the thinking goes, SABMiller would have had greater scale, and been in a position to be predator, not prey.

“We were too passionate about beer and too proud of our SA roots to be planning an exit,” Kahn says.

It was only after several years as a London-listed beer group, he says, that the end game started to become apparent.

“Once we realised we were being stalked by InBev, we began to think in terms of maximising our exit price.”

Today, the deal feels like it was inevitable. Between SABMiller’s London listing in 1999 and last month’s exit, the beer industry was awash with mergers. It was a Zeitgeist that had helped SABMiller climb to the apex of the brewing industry. Ultimately, however, it left them as the final brewing prize on offer for the only company larger: AB InBev.

Though SA Breweries started off with a handicap (sanctions until the early 1990s and access only to emerging market currency profits) the deal to buy US brand Miller in 2002 saw it leapfrog into the big leagues.

L-R August Busch III, CEO Anheuser-Busch; Carlos Brito, CEO AB InBev; Jorge Paulo Lemann, CEO 3G Capital and Graham Mackay, former CEO SABMiller

L-R August Busch III, CEO Anheuser-Busch; Carlos Brito, CEO AB InBev; Jorge Paulo Lemann, CEO 3G Capital and Graham Mackay, former CEO SABMiller

Mackay, one industry analyst said, “talked to everybody, all the time, more so than anyone else”.

Already in 2001, talk was rife that Belgian brewer Interbrew (the forerunner of AB InBev) was contemplating a hostile $6.6bn bid for SAB — a deal code-named “the Zulu Project”. But at the time, Mackay dismissed the need for a “major transforming deal”.

Fast forward to 2007: Interbrew had merged with AmBev three years before to create InBev, and was keen to merge with SABMiller. Tentative talks began.

At the time, InBev favoured a merger because it didn’t want to pay the premium SABMiller was demanding. However, SABMiller rightly believed that InBev would dominate a merger. The idea of a deal died.

Still, Kahn and his colleagues knew that it was pretty much a matter of time before a tie-up of sorts would become inevitable.

The same year, 2007, SABMiller and the iconic American firm Anheuser-Busch (which would soon fall to InBev) also had discussions about a tie-up – though largely as a defensive gambit to protect themselves from the ravenous advances of InBev.

Pride, it seemed, torpedoed this deal too.

At the time, August Busch IV, heir to the Anheuser-Busch empire founded in 1879, met Mackay to hammer out a deal.

There too, the gap proved unbridgeable, so no deal was struck. Instead, Mackay looked to the US, announcing a merger with Coors to create MillerCoors in that country.

This left Anheuser-Busch a sitting duck for InBev. Predictably, in 2008 (in the eye of the global financial crisis) InBev launched a $53bn all-cash offer for Anheuser-Busch.

In her book Dethroning the King, Julie MacIntosh describes how hordes of lawyers assembled one Sunday morning in July at plush offices in New York’s Park Avenue to hammer out the details. In the conference room next door, Richard Fuld, CEO of Lehman Brothers, was meeting with Bank of America to discuss a possible rescue plan.

“In that Sunday in July, in two adjoining conference rooms, the fates of two of America’s best-known companies were on the line,” wrote MacIntosh. Hubris played a big role in the demise of both.

Despite the financial crisis, InBev had little difficulty raising $45bn for the deal, hiking its borrowings to a staggering 4.7 times its earnings, before tax and other deductions. By the end of 2012, Brito and his executives, who stood to share a $1.3bn bonus, had slashed this to a comfortable 1.7 times.

However, with growth prospects in North America looking grim, it was time for the company to look to Africa and Latin America.

how the good times ended for sabmiller

This, of course, meant SABMiller.

According to their account of the decades of brewing deals, The Beer Monopoly authors Ina Verstl and Ernst Faltermeier say Africa was a no-brainer; it is forecast to provide 40% of global beer volume and profit increases over the next decade.

“Growth will not be smooth; in Africa it never is. But unlike China (over) the past 20 years, Africa’s volume growth will be very profitable,” they say.

The presence of monopolies or duopolies in most African markets underpins this profile. By buying SABMiller, AB InBev also gets its Latin American businesses, which enjoy dominance in their markets and are strong profit generators.

The truth is, AB InBev needed SABMiller. As analysts at Citigroup point out, the deal “is strategically transformational and enhances AB InBev’s growth outlook”.

This is evident from AB InBev’s third-quarter results, which showed overall growth in organic beer revenues of 2.8%. But SABMiller’s growth over that time was 5%, with a 10% jump in Africa alone.

Little wonder, then, that AB InBev was so relaxed about offloading more than half SABMiller’s beer volumes (in slow-growing Europe, US and China) in moves lauded as “respect for regional competition authorities”.

The Beer Monopoly argues that the eye-watering 17 times Ebitda paid for SABMiller was cheap at the price.

“(SABMiller’s) share price had slumped between 2014 and 2015 because of a weak SA rand and Colombian peso,” they say. In this context, mid-2015 looked like just the right time to launch the long-expected assault on SABMiller.

Not everyone agrees with Kahn that if they’d managed to acquire Mexico’s Femsa things would have been different.
Savvy dealmakers that Mackay’s team were, the boys from Brazil seemed tougher and more cutthroat. For financiers, their record of acquisitions is music to the ears.

It is a story enhanced with every repetition since the founders of 3G Capital (who had bought Brazilian brewer Brahma in 1989) merged with Antarctica in 1999 in a $1bn deal.

With every subsequent deal, they’ve delivered to their funders exactly what they promised. This was why, when they looked to raise $46bn for the SABMiller deal last December, it was hardly surprising investors ponied up $100bn.

As The Beer Monopoly points out: “Who cares about debt? As long as the fantasy of growth persists, debt is neither a nuisance nor a lasting burden, especially with current interest rates and brewers’ high cash flows.”

Of course, the downside for AB InBev is that it is doomed to be in a perpetual takeover cycle. It is not enough that it controls 27% of global beer volumes and more than 50% of beer profits. Shareholders of the now JSE-listed AB InBev shouldn’t expect the company to stand still very long.

Bernstein Research’s Stirling has named Coca-Cola (some say Pepsi) as the group’s next likely target as it chases a turnover target of $100bn by 2020. This is ambitious, considering the merged AB InBev/SABMiller entity would produce only $64bn in revenue.

In contrast, SABMiller’s growth strategy was always curtailed by its SA history. In the early days, debt was not an option. Takeovers were done on the basis of alliances (a good reason why Mackay was so friendly with everyone). But while these deals enabled SAB to grow (the acquisition of Miller and Bavaria led to Altria and Bevco, respectively, becoming the dominant shareholders), they also ensured SABMiller could not prevail in the final showdown.

Both Altria and Bevco made it known early during the Megabrew talks that they were keen to switch allegiances to AB InBev. From that day, SABMiller’s fate was sealed.

So what can South Africans who have shares in AB InBev expect? It’s a pertinent question, given that in the few weeks since it listed on the JSE, its stock has tumbled 20% to around R1,458/share.

Should investors put their money into the new brewing giant?

Those who worry AB InBev has lost its edge say “no”. But most analysts say “yes”, expecting sizeable growth in the next few years, precisely because of how “disciplined” AB InBev has been on costs.

In 2015, Fortune magazine reported that after a deal involving 3G Capital, workers can expect “widespread layoffs, lower budgets, new levels of austerity and a shift in corporate culture”.

But it added that shareholders can expect much larger profits as 3G is a “profit and margin-generating machine”.

Citigroup, which calls AB InBev a “buy”, says the new combined company is “well-positioned to deliver” between 7% and 9% of growth in earnings over the next few years.

In a research report, SBG Securities says AB InBev “tends to exceed its original cost-savings targets with between 40% and 68% of these savings making their way into operating profit” — boosting margins.

AB InBev’s operating margin, which was around 31.9%, is likely to strengthen north of 33% in the next few years.

Given the fall in the share price in recent days, it seems a good bet for people who believe in Brito’s tough-as-nails culture.

SBG Securities, which believes the share price could hit R1,975 in the next year — far above its current levels — is a firm believer.

“It should be a core holding in an investor’s consumer staples universe. This is particularly true for SA shareholders, where AB InBev would provide investors with a more effective rand-hedge investment than SABMiller has been,” it says.

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