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UK: SABMiller PLC has options in mature markets for boosting its global spread, according to analysts. Recent press reports have said SABMiller PLC, the world's second-largest brewer, is in talks to buy Canada's Molson Inc., though both companies have declined to comment. Even if that deal doesn't go ahead, some analysts say SABMiller might still aim to increase its brand exposure in a mature market - rather than the emerging markets with their potential for faster growth, Dow Jones posted on September 23. Lehman Brothers reckons that because SABMiller is still tipped towards emerging markets, the acquisition of a further mature market beer company such as the U.K.'s Scottish & Newcastle PLC "cannot be ruled out."

SABMiller, which is listed in Johannesburg and London, has its main operations in South Africa and the U.S. and a presence in other emerging markets, including China and Russia. It was created when South Africa's SAB bought Miller from Altria Group Inc.'s (M) Philip Morris in 2002. The company's only big brand in Western Europe is Italy's Peroni.

SABMiller's Chief Executive Graham Mackay said the company isn't in a position where it has to make "a landscape-changing deal," but would evaluate opportunities on their merits. Lehman Brothers believes a deal in a mature market would "reduce the risk factor." Because SABMiller has high exposure in Africa, it's more at risk from currency fluctuations and political instability. "European beer companies have strengthened their growth profile by heavily investing in emerging markets...SABMiller came from the other direction," Lehman Brothers said. It estimates around 80% of SABMiller's earnings before interest and taxes come from emerging markets. "In order to lower the overall risk profile by moving towards a 50/50 mature/emerging balance, we believe the company may need to acquire assets in mature markets," Lehman Brothers said.

However, SABMiller said it was "a gross over-simplification" to say that 80% of its earnings come from emerging markets. "You can't suggest that Zimbabwe and Poland display equal political and economic risk characteristics," the company said.

Molson and Adolph Coors Co. announced a merger in July, though the deal has faced skepticism from some Molson shareholders. Now SABMiller is reported to be in talks with Ian Molson, a cousin of Molson chairman Eric Molson, and Canada's Onex Corp. about a possible joint offer for the Canadian brewer. However, Molson's existing joint venture with Coors could pose a problem for such a deal. Molson brews and distributes Coors Light in Canada, which is very profitable. Coors has said it will withdraw its brands from Molson if it enters a merger with another company.

David Belaunde, an analyst at Lehman Brothers, reckons buying Coors would be a good move for SABMiller if the opportunity arose. Belaunde reckons buying Coors would generate "huge cost synergies" and would enable the combined company to compete more effectively against Anheuser Busch Cos. Inc., the world's largest brewer. It would also allow SABMiller greater negotiating power over the distribution system in the U.S. However, such a deal would effectively create a duopoly in the U.S. and could run into competition issues, he said.

Alternatively, Belaunde suggested the company might be interested in buying Scottish & Newcastle. S&N is the U.K.'s biggest brewer by volume, with brands such as Kronenbourg 1664 and John Smiths Ale. He said this would "fill its gap in Western Europe and give it access to Baltic Beverage Holdings - Russia's number one beer company." S&N has been the subject of takeover speculation over the past year after selling its pub and hotel business. It is now exposed mainly to the sluggish Western European market. S&N wasn't available for comment. Another analyst said buying S&N would give SABMiller access to a wider investor base. Its existing base is predominantly South African.

On the other hand, it would require investment in markets such as the U.K. and France, he said. SABMiller might find this "hard to justify," as the Western European beer market is low-margin, heavily regulated and reaching maturity, the analyst said. He said a joint venture with Diageo PLC's Guinness would work extremely well for SABMiller, giving it a further foothold in the U.S., Africa and Asia Pacific.

However, not all analysts believe SABMiller needs to boost its mature market operations. David Liston, senior analyst at Barclays Private Clients said it should continue to focus on emerging markets. He said SAB bought Miller because it wanted less dependence on the South African rand. But emerging markets are where it's had the greatest success and "give it access to good volume growth and the least competition." Liston expects SABMiller to look at further opportunities in emerging markets such as China and Central America.

Although SABMiller hasn't completed a large deal since the Miller purchase, this year it has continued to build up its presence in emerging markets. In March, it agreed a small joint venture with Castel Group in Algeria and Morocco. The company was pipped at the post by Anheuser-Busch for China's Harbin Brewery in June, but said last week it has bought New Zealand-listed Lion Nathan Ltd.'s (LNN.NZ) Chinese brewing interests, with its joint venture partner China Resources Enterprise Ltd. "This transaction takes SAB's China business to a new level by giving it a meaningful presence in most important Chinese regions," said Anthony Geard, an analyst at Investec Securities, referring to the economically active Yangtze River Delta close to Shanghai. There's huge potential for SABMiller in China, said J.P. Morgan.

SABMiller generates around 2% of group earnings before interest, taxes and amortization from the country, but volumes are higher than in South Africa. J.P. Morgan, its house broker, said "significant profitability (in China) is proving a long-term ambition for SABMiller."


25 September, 2004