USA: Coors and SABMiller merger could be a solution on a weak North American beer market

The continued weakness in the crucial North American beer market has fuelled speculation of a possible merger between SABMiller and its US rival Coors, according to Business Report, May 18.

A tie-up between Coors and SABMiller would create an entity with about 30 percent of the US beer market. It would be better placed to counter the impact of the aggressive marketing tactics employed by Anheuser Busch's Budweiser, which has more than 50 percent of that market.

The financial 2007 results released yesterday by SABMiller revealed a generally strong performance - but one that was once again overshadowed by the poor showing at Miller's operations in the US.

While overall group revenue was up 22 percent to $18.6 billion (R129 billion) and earnings before interest, tax and amortisation (ebita) was also up 22 percent to produce a 10 percent increase in earnings to R1.20 a share, things looked quite different over at Miller.

The US-based beer operation reported a 1 percent decline in revenue for the 12 months to March and a 17 percent decrease in ebita.

In the face of continued difficulties, some analysts are now talking of a possible merger between Miller, which has 18 percent of the US beer market, and Coors, which has about 12 percent.

The alternative prospect of a disposal of Miller was dismissed by SABMiller media spokesperson Nigel Fairbrass, who said there were no plans to sell Miller.

"It is a substantial number two player in that market and provides us with a very attractive platform to market various brands," Fairbrass said.

Leading SABMiller analyst Julian Wentzel of Macquarie First South said yesterday after the release of the results that in view of the difficulties, a tie-up between Coors and SABMiller was "making more and more sense".

Although a tie-up would offer significant synergies, it would not be without its problems, one of which would be the competition regulators.

In addition, the two groups are competing for the same segments of the US beer markets.

Managing the overlap would be challenging and could lead to a loss of benefits of scale.

But if managed well, the operational benefits from the increased scale would be considerable.

These benefits would also assist the combined entity in its efforts to deal with Anheuser Busch's aggressive marketing tactics.

Coors, which is controlled by Molsen-Coors family interests, has recently reported comparatively strong results. It may not be as attracted by the benefits of a merger.

But on a longer-term view, given the difficulties faced by the number two and three players in sustaining profit growth, a deal might seem more compelling.

The combined effect of the excellent performances from SABMiller's operations in Europe and its enlarged operations in Latin America, as well as the continued weakness of the Miller operations, means that North America now accounts for only 10 percent of SABMiller's ebita of $3.6 billion.

This is down from 15 percent in financial 2006.

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