A Diageo + AB InBev Tie-up?

Editor’s Note:  We have looked at some of these tie-ups before, so the space is ripe for a reconsideration.

Anheuser-Busch InBev is a juggernaut in the beer space, accounting for approximately 21% of worldwide beer production, but 35% of the global revenues in this market, owing to its premium beer portfolio. While having a strong presence in the Americas and Europe, AB InBev has no meaningful presence in Africa. So when news broke that 3G Capital Partners, a Brazilian private equity firm that owns a substantial stake in AB InBev, was rumored to be in talks to purchase Diageo, both stocks went up. Although the acquisition might not be likely, due to the potential size of the deal, regulatory issues, whether the named buyer would be able to do their usual cost cutting in the spirits business where companies usually focus on growing revenues and not cost cutting, the chance that 3G might bring in AB inBev as a partner to do the deal might be intriguing. While this is still only conjecture, here’s why merging with the U.K. based Diageo could be good for AB InBev:

  • Diageo’s beer portfolio, including Guinness, forms around 2.5% of the global revenues, and fits right into AB InBev’s lineup of premium beer brands.
  • Beer accounts for approximately 70% of Diageo’s revenues in Africa, which, in turn, contributes slightly less than 20% of the company’s net volumes. Beer is expected to grow in Africa due to increasing disposable incomes and low current beer penetration of ~9 liters per person annually (Global average is 45 liters per person).
  • Productivity and large setup costs are obstacles in Africa, but acquiring the already established Guinness and other Diageo beers will allow AB InBev to penetrate the continent, and also compete better with its closest rival SABMiller, which dominates the beer industry in this region, with over 30% of its revenues coming from South Africa and the rest of the continent.
  • Apart from beer, which forms 20% of Diageo’s top line, the company sells many alcohol brands across the spirits and wine categories. Antitrust policies might not allow AB InBev to add more beer brands to its lineup in the U.S. (the brewer already has a substantial 46.4% share), so the brewer could diversify its portfolio by adding brands such as Johnnie Walker, Crown Royal, Smirnoff, and Cîroc, etc. Moreover, as beer companies are losing customers to spirits and wines, AB InBev could enter these segments for more growth opportunities, through the possibility of a Diageo acquisition.

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