Big Brewers Continue Same Old Dance; Can't Hear the New Music

Update: this just happened, it's all up to the anti-monopoly agencies now.

As beer drinkers in America continue to abandon light bland lagers for more interesting and varied beers (at a small but growing pace), the folks who run the world's largest breweries continue on as if nothing had changed. There is news today (in the Wall Street Journal) that ABInBev -- the Brazilian-Belgian behemoth that is inexorably swallowing everything beer-related -- is nearing a deal to purchase Grupo Modelo, the Mexican brewer of Corona and Modelo Especial. (if you didn't know, these are two very light, bland lagers that sell in huge amounts in America).

Anheuser-Busch InBev NV is close to taking control of Corona Extra beer maker Grupo Modelo, according to people familiar with the matter, in a deal that could be valued at more than $12 billion and would end a contentious history between the two companies. It would also consolidate the Belgian brewer's ownership of Corona Extra, one of the world's top beer brands.
AB InBev currently owns a 50% noncontrolling stake in Modelo, Mexico's largest brewer. The timing of any deal is uncertain, though two of the people said it could come as early as this week. It's also possible that the talks could break down before any deal is reached.

This, against a backdrop of shrinking sales of light, bland lager in the U.S.; although it must be said, that while ABIB's volume sales continue to drop, their profits continue to climb as they ratchet up prices and cut costs. Buying a huge Mexican brewery that makes a fairly high-priced brand -- Corona -- and one of the few strongly-growing light, bland lager brands -- Modelo Especial -- must make these guys salivate. A new company to cut fat out of, and two huge brands (three, really; Corona Light does okay too) ripe for the jacking up of the prices! It's like Christmas morning.

And it's happening around the world, as the WSJ article points out. 

London-based SABMiller agreed to acquire Australia's Foster's last year for some $10 billion, and Dutch brewer Heineken NV paid roughly $7 billion for Femsa Cerveza, Mexico's No. 2 beer maker after Modelo, in 2010.
More recently, Molson Coors Brewing Co. (like SABMiller and ABIB, the merged product of two colossal brewers) this year agreed to buy the Central and East European brewer StarBev LP for $3.5 billion, the biggest purchase ever for the company. The business had been owned by AB InBev, which sold it as part of its post-Anheuser deal retrenchment.

To what end? Well, come on: there's still stellar tons of money to be made in the light, bland lager business. You must know that, even if you spend all your waking hours in a brewpub. But what's the foreseeable end? I still think it looks something like this. I don't see any change in direction, though I have noticed that financial analysts have finally caught on: instead of urging the bigs to focus on their reliable core business -- the light, bland lagers that are losing steam -- they've reversed course and are telling them to get on this craft beer thing. 

If they do, in a big bold way...that could be a game-changer. Because as current sales figures prove, most Americans don't care that they're buying their beer from a big, soulless, foreign-owned corporation, and if that corporation makes a beer that tastes different, and celebrity chefs talk about it, and it has cool ads...they're probably going to buy it. That day's coming closer, and it's going to be a challenge for small brewers to survive against it.

I could be wrong. But I keep thinking of that Damon Runyan line from Guys and Dolls: “The race is not always to the swift, nor the battle to the strong...but that's the way to bet.”

Carlos Wept

Is the consolidation of big brewers going to reduce itself to absurdity? Speculation continues to strengthen that Anheuser-Busch InBev is going to make a bid for SABMiller. Leaving anti-monopoly issues out of it for the moment -- since, well, really: does anyone actually think the U.S. government is going to do anything about one company controlling 2/3+ of the beer market? Of course not; return to work, cogs -- let's think about this.

ABIB has the means to do the deal; they've been slashing costs and raising prices (even though their volume in their most lucrative market -- the U.S. -- is still dropping), they're making more money (not a great long-term state, how long can that go on, eh?)) and the debt from the purchase of A-B is either paid off or close to it; they've got a substantial warchest of almost $5 billion in cash/equivalents that will make a good start towards financing another acquisition.

ABIB probably wants to do the deal. SABMiller has been investing heavily in Africa and Asia, which are still growing beer markets (and ones where ABIB has not been particularly successful). And let's be honest: this is how Carlos Brito and InBev have worked for years. They are not brewers: they are bankers, and they grow their "breweries" by buying other "breweries," which are just counters, money, and markets to them. It's about money and balance sheets, slashing costs and raising prices. Anyone still shocked by that? God, I hope not.

Can SABMiller stop them? Dunno. Finance is not what I do. But judging from the speculation and the effect it's having on SABMiller's share price, it seems like a good guess that the answer is no. Especially since the market seems to "want" this to happen.

That's too bad. For one, the management at SABMiller is pretty sharp, especially in the U.S. part of the company. Sure, head honcho Graham Mackay said that craft beer would inevitably fade -- how's that working out for ya? -- but he's been brilliant on just about everything else. He's probably moving on soon anyway, but he's got some very smart lieutenants...and ABIB would probably dump them all and replace them with bean counters. It seems to be what they do.

This does mean something to you, of course. Consolidation will inevitably lead to more price increases, and when the mainstream beers that are still over 90% of the market take price increases, that's a green light to craft brewers to follow the leaders. Really, they do, because they can, and they want to pay their workers a better wage so that a craft brewmaster can finally make as much as a bottling line worker at a Miller plant.

The upshot? Kinda weird. Like I said here, 2 1/2 years ago, one of these days, Carlos Brito is going to run out of big breweries to buy...and then what happens? Will he start buying spirits companies? Will he start buying into wine? One thing I feel pretty sure about is that he won't suddenly decide to buckle down and make brewing the real focus of his energies. It's just not his style. Or his interest.

Consolidation Beat goes on, says MarketWatch

Following up on yesterday's post on the Heineken-FEMSA deal, an article from MarketWatch sees more brewery consolidation to come at the top. (I let you down; should have had this for you, because it's all stuff I knew. Sorry.)

Currently, the four top players control about 50% of the global market. And in his remarks, Heineken CEO Francois van Boxmeer said it is likely they will soon gobble up another 25% between them.

It's out there, waiting to be had. FEMSA's Mexican compadre, Grupo Modelo, is already half-owned by ABIB, and there's a good-sized chunk right there.

There are bumps in the road. The remaining breweries are often owned (or partially-owned) by families or foundations, which will present challenges to a quick acquisition...but it's hardly a dealbreaker; A-B was partly family-owned, after all, as is FEMSA (and Heineken, far as that goes).

Will we see 75% of the world's beer market controlled by two to five companies? What effect will that have on beer prices, on brewing commodities? Why isn't this an anti-monopoly issue?

Tom Moore/Barton bought by Sazerac: distillery & brands

Big news on John Hansell's blog: Sazerac (better known to most by their Buffalo Trace moniker) has bought the Tom Moore Distillery and the Barton brands of bourbon. Actually, they bought a bunch of brands:

99 schapps (family); Barton (family); Calypso (family); Canadian Host Whisky; Canadian LTD Whisky; Canadian Supreme Whisky; Capitan Tequila; Caravella (family); Chi Chi's (family); Colonel Lee; Crystal Palace (family); Czarina (family); Diamore (family); Effen Vodka (family); El Toro Tequila (family); Fleischmann's (family); Fourth Colony (family); Glenmore (family); Hartley's Brandy, Highland Mist Scotch; House of Stuart Scotch; Imperial Blend Whiskey; Inverhouse Scotch; Jacques Bonet Brandy; Kentucky Gentleman (family); Kentucky Tavern Bourbon; Lauders Scotch; Meukow Cognac; Montaillac Cognac; Monte Alban; Montezuma Tequila (family); Mr. Boston (family); Naked Jay Vodka; Northern Light Canadian Whisky; Old Thompson Blend Whiskey; Olo Rum; Pikeman Gin; Ridgemont Reserve 1792; Royal Award (family); Royal Club Blend Whiskey; Royal Embassy (family); Sabroso (family); Skol (family); Ten High (family); Tom Moore Bourbon; Very Old Barton Bourbon; and Wide Eye Schnapps (family).

There are some names there -- Tom Moore, Kentucky Tavern, VOB, and of course, Ridgemont Reserve -- that I can definitely see a smart bunch of folks like Sazerac doing something great with. Hell, just getting VOB's name out there more would be a good thing. And, as John says about the rest of these brands:

A lot of it is low-end whisky (and whiskey) brands and non-whiskey spirits. But the most significant thing, from a whiskey perspective, is that the Tom Moore Distillery, and the whiskeys made there (Barton, Ridgemont Reserve) are part of the deal.

Whoosh. Seismic, I tell ya.

Another Bump on the Road to InBud

From a Financial Times story on Carlsberg's problems with the weakening Russian rouble (Carlsberg gets about 40% of their profits from their biz in Russia, so it's a big deal for them), comes this further dose of bad news for prospects of the InBud deal:

Currency declines have...hurt the stock of...InBev. The Belgo-Brazilian brewer's stock fell 34 per cent over the past month, closing at €28.68 on Thursday amid fears over its exposure to the sliding Brazilian real (Brazil accounts for about half of InBev's profits.)
The lower InBev's stock falls, the more risky its planned takeover of US brewer Anheuser-Busch becomes. The brewer has already postponed a $9.8bn rights issue to help pay for the takeover, blaming volatile equity markets.
When the deal was announced in July, InBev's shares were trading at €45 and the company would have needed to issue around 196 million new shares to raise the $9.8bn, investment bank Dresdner Kleinwort said. It would now need to issue more than 320 million shares - and find people to buy them.
Anheuser's stock was trading at about $58 on Thursday, some 17 per cent below InBev's offer price of $70 per share.

So when I asked my old college buddy in a local investment firm back in May, what's all the financial activity around BUD mean, he told me that investors were betting that A-B was going to get bought. If BUD is trading 17% below the price shareholders are supposed to reap when InBev buys them out... One of you financial whizzes wanna explain all this?

Holy Crap II: Old Dominion to be shut down

In a move that's probably not so shocking, Coastal Brewing has announced that they will be closing the Old Dominion brewery in Ashburn, VA, not that long after closing the pub there (while assuring us that the Virginia brewery would remain open). From the press release (which Mid-Atlantic Brewing News guy (and friend) Gregg Wiggins was good enough to forward to me):

COASTAL BREWING CO. TO CONSOLIDATE BREWING OPERATIONS

DOVER, Del. (October 21, 2008) – Coastal Brewing Company announced today that it will consolidate its operations by moving all brewing to the company's state-of-the-art facility in Dover, Del. The decision means that the company's brewery in Ashburn, Va., will be closed in 2009.

Employees of the company's Ashburn brewery will be offered continuing employment at Coastal's main brewery in Dover. Those who elect not to transfer will be offered competitive severance packages upon the brewery's closure.

Coastal Brewing Company's full line of beers, including brands under both the Old Dominion and Fordham names, will continue to be brewed with the same care and ingredients, and will continue to be marketed and distributed throughout the Mid-Atlantic region of the U.S.

And may God have mercy on your soul...

What's it mean? At this point, outside of the loyal folks who still went to the improptu events still being held at the brewery, not much. Old Dominion's on the shelf, so's Fordham, and they will sink or swim on their merits and marketing support...because it won't be on their heart or soul. I liked these brands, these beers, five years ago. But Jerry Bailey's gone, the brewery in Annapolis is gone... It's Baltimore Brewing all over again. Who's going to give enough of a damn to hit the street and really sell these beers when the people who make them apparently aren't all that fired up themselves? The only hint of life I see from these guys is the Ram's Head outlets, while on the beer side, they've tried to make hay on a campaign about making real beers (the implication being that "other breweries," like Dogfish Head, made weird beers); great success with that one.

It really does look like Baltimore Brewing. OD had a heyday, when you could find it everywhere in the area. That slipped, and now, as it slips completely out of state to Delaware, it seems likely that Old Dominion will become a memory. The worst may be yet to come: speculation is that InBev will rapidly divest itself of the partial investments A-B made in companies like Coastal. And that may take the wind right out of these sails.

InA-BuddaBevida suddenly much closer to reality

InBev and A-B's little dance of bluster and bucks may be coming to a quick end as a report of a sweeter deal comes out this morning. According to a variety of sources, InBev is ready to boost their offer to $70 a share, a $4 billion increase on their initial $65/share offer, and A-B's board is suddenly nodding, grinning, and, presumably, rubbing their hands together in anticipation of all that moolah.

This would create what is undeniably the world's largest brewer: $36 billion in annual sales, over 322 million barrels of beer, selling 300 brands on six continents. Wow.

They only have to deal with minor stuff: "so-called social issues including what the combined company would be called still need to be worked out." Hey, guys: the name in the subject line -- with its Belgian/Brazilian/Budweiser flair -- is all yours for a modest fee!

I'll have more to say, but that's the news for now. Looks like Bud's getting a Brazilian trim.

Magic Pyramid

I just learned that Magic Hat has filed a letter of intent to buy Pyramid, a cross-coast merger that will take Pyramid private, and possibly give it some of that Magic Hat magic. Magic Hat's offering $2.75 a share for Pyramid stock, a nice premium over Monday's close of $1.76. Pyramid's board has approved the transaction, as have "certain shareholders" who own about 29% of the company's stock.

From BusinessWire:

“The combination of these two well established, high profile craft breweries will be very complementary given our respective brand portfolios and the geographies in which we predominantly operate. Additionally, there will be a number of important benefits for Pyramid to be part of a private company versus continuing to operate as a stand alone public entity. This consolidation makes both good strategic and financial sense and is well timed, particularly as the beer industry’s competitive dynamics continue to intensify,” said Pyramid CEO Scott Barnum. “The Company will continue to have offices in Seattle, its historical home, and will seek opportunities to capitalize on the enhanced assets and capabilities of the new combined entity,” he added.

Martin Kelly, CEO of Magic Hat said, “We have a great deal of respect for Pyramid’s brand heritage, award-winning beers and its dedicated employees, and look forward to consummating this transaction, which provides both strategic and financial benefits both to Pyramid’s and Magic Hat’s stakeholders.”

The deal is subject to the agreement on a merger transaction, and is expected to be completed by the end of August. It includes the Pyramid and MacTarnahan Alehouses.

Well...as Scott Barnum said, it certainly looks like a complementary merger. There's not a lot of market overlap -- though it's a question whether either company really has the reach to meet in the middle -- and the portfolios should mesh well. People have been murmuring about Magic Hat looking to be bought for years; apparently they preferred to do the buying. My big question is...how come? Why combine a solidly Northwest brewing company with a solidly New England brewing company? Can't be the great success Redhook has had with their New England expedition. I would suspect it's more a craft-based case of the consolidation fear that's gripping the world's big brewers: pair up and get large now, before all the good partners are gone and you're left as an also-ran.

A Mating of Giants in the offing?

Rumors continue to circulate about a true merger of giant brewers Anheuser-Busch and InBev. I've heard them for a while, but the pace is accelerating, and today an industry analyst said that the SABMiller purchase of Grolsch would give such a merger more urgency.

Madness. Take a look at Stan's exegesis of Melisa "Girl's Guide to Beer" Cole's post about the "tumbling" pub beer sales in the UK. It's not beer sales that are down, it's lowest common denominator beer sales that are down. Specialty beers are up 7.5%, and it looks like they'll be up in double digits again this year in the U.S., too. The big guys are so busy merging and consolidating and making the market safe for their one kind of beer, that they apparently haven't noticed that the thing people seem to want less and less of is ... one kind of beer.

Anyone know where these guys can buy a clue? A-B is making some good beers, but it sure looks like they're afraid to go all-in on them. Miller sees that variety means good business, but then executes with Chill, essentially High Life with lime flavoring, which completely misses the point. And Coors has Blue Moon zooming, and seems to have no idea how to handle it, they're scared to death that if they come right out and publicly admit it's theirs, people will stop drinking it.

The hell of it is, Coors may well be right. No one really knows for certain why craft beers are doing so well, and the scary thought is that it may have nothing to do with how they taste. I see it a lot. People are buying this stuff, they have no idea what it is, or what it tastes like, but it's different and it looks different, and it costs more, so...they drink it. Kinda mindless. Kinda scary.