The world's top two beer makers agreed Tuesday to join forces to create a company that would control nearly a third of the global market and threaten to dominate the U.S. by bringing together Budweiser and Miller Genuine Draft.
After turning down five offers, British-based brewer SABMiller accepted in principle an improved takeover bid worth $106 billion from Anheuser Busch InBev, which along with Budweiser makes Corona, Stella Artois and Beck's. Aside from the Miller beers, SABMiller owns Peroni, Grolsch and Milwaukee's Best among its 200 or so brands.
The combined company would control eight of the 10 top-selling U.S. beers: No. 1 Bud Light, No. 3 Budweiser, No. 4 Miller Light, No. 5 Corona Extra, No. 6 Natural Light, No. 7 Busch, No. 8 Michelob Ultra and No. 9 Busch Light.
The sheer scale of the deal means it will likely run into resistance from regulators, notably in the U.S. and China, amid concerns it could stifle competition and decrease choice for consumers. In the U.S., the Miller stable of beers are widely expected to have to be sold in the event of a deal.
The appeal of the tie-up for the companies is that they complement one another. AB InBev is seeking to add to its strong position in the Americas and Europe with SABMiller's presence in fast-growing markets in Africa and Oceania.
With combined sales of over $70 billion a year, the companies would also be in a stronger position to face the rising influence of craft beer.
Even though the acquisition is some 15 percent costlier than AB InBev had hoped a few weeks ago, the company has a reputation for fierce and relentless cost-cutting.
Professor John Colley of Warwick Business School said to "expect substantial redundancies" over the coming year, potentially in head offices and country management teams.
"AB InBev has both a reputation and demonstrable track record for being able to effectively extract these savings," he said.
SABMiller employs 69,000 people in 83 countries. AB InBev has 155,000 workers in 25 countries.
Having dismissed previous proposals over the past few weeks as undervaluing the company, the directors of SABMiller unanimously agreed to an offer that values each SABMiller share at 44 pounds. SABMiller's two biggest shareholders, Marlboro owner Altria and Colombia's BevCo would get both cash and shares for their combined 41 percent stake.
Following Tuesday's announcement, Fitch Ratings reiterated its view from last week that it may downgrade its credit rating on AB InBev. Senior director Giulio Lombardi warned that the $125 billion in debt that the company would have would be a lot given the market is getting tougher in the developed and the developing worlds.
"There's definitely going to be a downgrade," said Lombardi.
The scale of the downgrade, he added, will depend on the terms of the deal when it is formalized, such as what assets are sold and what integration strategy is pursued.
Lombardi conceded that the deal is "great" in terms of its scope for savings, but that he is "mindful of the challenges big brewers face."
AB InBev has until Oct. 28 to come up with a formal offer. In that time, the two sides will work on the terms and conditions of the takeover as well as the financing of the deal.
The markets think the deal is now very likely and SABMiller's shares were trading right near the bid price. In early afternoon trading in London, they were up 9.3 percent at 39.59 pounds. AB InBev's share price was 1.5 percent higher at 99.84 euros in Brussels.
In statements, the two companies said the all-cash offer represents a premium of around 50 percent to SABMiller's share price on Sept. 14, the last trading day before renewed speculation of an approach from AB InBev emerged.
The new company is expected to be based in Belgium, AB InBev's current headquarters where there is a beer tradition reaching back to the Middle Ages.
AB InBev has agreed to pay $3 billion to SABMiller if the deal does not close because of failure to get the approval of regulators or AB InBev shareholders.
Most analysts think that the geographical diversification of the two companies is such that there will not be so much overlap to force regulators into scrapping the deal outright.
"Approval will be a bit of a challenge but easier than it would be for most deals of this size," said Erik Gordon of the Ross School of Business at the University of Michigan.
Regulators could force the companies to sell some brands. Many analysts think that the merged company will be compelled to sell the Miller line of beers in the U.S. At present, those beers are parked in a joint venture with Molson Coors in which SABMiller owns a 58 percent stake. SABMiller's joint venture in China — CR Snow — with China Resources Enterprise is also tipped to go.
"The problem jurisdictions will be the U.S. and China. The Miller-Coors venture in the U.S. probably will be unwound and some assets will be divested in China," Gordon said.
The beer industry has been consolidating for the past decade as brewers seek to gain clout with suppliers, distributors and retailers.
"The global beer market overall is largely flat and in some regions is declining as other beverages such as wine continue to penetrate," said Warwick Business School's Colley. "Micro brewers and their highly differentiated cask ales also continue to make progress."
The increase in popularity of craft beer has been the biggest change in the industry over the past few years and that's hitting big brewers, particularly in the developed world.
Fitch's Lombardi noted that in the U.S., craft beer sales account for 10 percent of beer volumes and 15 percent of value — against virtually nothing a few years back. The same could soon apply in Europe, he added.