Beer Merger Could Ferment Cola Wars

The $104 billion merger between Anheuser-Busch InBev (NYSE: BUD) and SABMiller (OTC: SBMRY) will affect more than beer. The effects will be felt across the entire beverage sector.

That includes the soft-drinks sector.

As I mentioned in my article on the birth of “Megabrew,” the deal will have implications for the future of both Coca-Cola (NYSE: KO) and PepsiCo(NYSE: PEP). That’s because all the companies involved have relationships with each other.

Cola Wars, Fermented

Anheuser-Busch InBev currently has a bottling relationship with Pepsi. Meanwhile, SABMiller has a bottling arrangement with Coke.

AB InBev bottles Pepsi beverages in Brazil, Argentina, Bolivia, Uruguay, Peru and the Dominican Republic.

SABMiller is or will soon be bottling Coke products in El Salvador and Honduras, along with the African nations of South Africa, Kenya, Ethiopia, Tanzania, Mozambique, Uganda, Namibia, Zambia, Botswana, Swaziland, Comoros and Mayotte. These countries account for about 40% of Coke’s soft-drink volume in Africa.

It is unlikely the newly combined “Megabrew” would be able to keep a relationship with both Coca-Cola and PepsiCo. Both rival soft-drink firms would be worried that proprietary information and analysis may become available to the other through the beer channel.

AnheuserBusch-InBev will have to make a choice: Coke or Pepsi?

In my view, AB InBev will choose Coke. Its second largest shareholders are the Brazilians that founded 3G Capital. We all know about the growing ties between 3G and Warren Buffett. And we also know that Buffett’s Berkshire Hathaway (NYSE: BRK-B) owns about 400 million shares of Coca-Cola.

There are other factors favoring Coke. One is its global distribution system that is the envy of the consumer-goods world.

And as with beer, there is the African growth component. According to beverage research firm Canadean, the African soft-drink market will expand by at least a third by 2019.

Another factor at play here is the fact that AB InBev already has its own growing soft-drink business in Latin America with a number of successful brands.

Another Takeover Down the Road

The story doesn’t end there though.

Management at whatever soft-drink company AB InBev chooses had better watch out. The highly acquisitive AB InBev will have their foot firmly in the door.

Keep in mind that the company, led by CEO Carlos Brito, has made a major acquisition roughly every four years. A takeover of Coca-Cola or PepsiCo may be next on his agenda near the end of this decade.

Some may think that combining a huge beer corporation with a large soft drinks and/or snack foods company would make for a strange brew.

Not really. Just take a look at a smaller-scale version of such a company: Japan’s Suntory Beverage & Food Ltd. (OTC: STBFY). This company is best known to Americans thanks to its $16 billion acquisition of Jim Beam bourbon in 2014.

Suntory has been able to successfully combine diverse operations in beer, wine, hard liquor, food and health foods around the world. I’m sure the very sharp management at AB InBev would be up to the task, albeit on a grander scale.

So don’t be surprised to see the company shake up the beverage industry again in a few years – this time with a purchase of Coke or Pepsi.

SOURCE: http://www.wyattresearch.com/article/beer-merger-cola-wars/