The deal, formally agreed on Wednesday (November 13) but subject to regulatory approval across the world, could force other global brewers into mergers “to compete on cost grounds and distribution grounds”, according to John Colley, professor of strategy and international business at Warwick Business School.
Molson Coors might not be independent for long, he warned. The Montreal-based brewer is already in the process of a $12bn acquisition of MillerCoors – a company previously held in partnership with SABMiller.
The SABMiller/AB InBev deal will result in the new company having a 28.4% global share of the beer market, nearly three times that of its closest rival, Heineken.
“In view of the size and scale of AB InBev post the SAB Miller deal, there is likely to be further consolidation among the remaining players,” Colley said.
“This is a trend in the pharmaceuticals industry, where valuations are increasing as the industry rapidly consolidates. Maintaining product availability through distribution requires sizeable advertising budgets in order to compete with the big brands.”
Colley believed the £71bn takeover was “well below expectations”, suggesting that pricing and distribution benefits may be the real driver of the deal.
Forced sales such as the shareholding in MillerCoors through competition authority pressures with others to follow, possibly in China, Latin America and Europe, means further lost value to shareholders, he said.
“Further concessions might also be required in the US. At what point does this become value destroying? Research shows most acquisitions result in destroying value rather than creating it. Will this deal buck the trend?”
“Big brand brewing is highly profitable due to scale and scope economies related to the size of the main players. However, it is their stranglehold on distribution through bars, restaurants, supermarkets and entertainment venues that prevents effective competition. The power of advertising together with product availability is highly potent – just ask Coca Cola.”
AB InBev’s results show that big brands are continuing to make ground, further limiting competition, Colley suggested.
“It is rare that the number one player in an industry buys the number two player, creating a worldwide market share of almost 30% in a consumer market. The global brewing industry is already concentrated, with the top five (soon to be four) sharing almost 50% of the market.
“Research shows that fewer competitors in an industry, and specifically the brewing industry, results in higher profits and consequently less consumer choice.”
The merger is also likely to further restrict consumer choice, and limit price competition in an industry that already demonstrates “stratospheric” levels of profitability, he added.
“AB InBev has earnings before tax, depreciation and interest of around 40%. The beer consumers’ hope is the growth of craft beers. These are rapidly multiplying and have a significant share in pub sales.”