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Constellation share gains accelerated and root beer happened in a big way. Constellation share gain at 1.2 for last 4 wks thru 11/14 and 1.3 for 4 wks before that. Now up 1 full share of $$ yr-to-date. Constellation's accelerated share gains were stated reason for recent Cowen and Co upgrade to its stock. Meanwhile, Not Your Father's Root Beer "slowed" to 0.6 share last 4 wks, compared to 0.7 for 4 wks prior, while Coney Island Root Beer at 0.2. Now there's lotsa talk about root beers having greater than expected seasonality, slowing lots, backing up. And AB and MC coming with their own hard sodas in 2016. In meantime, root beers represent another almost full share that AB and MC ain't participating in. Constellation and root beer account for 2+ share gains in recent periods. Craft collectively is the other big winner, tho that too has slowed in recent periods. Up only 0.6 share in Nielsen last 4 wks, compared to 0.9 yr-to-date. Then again, this cut of Nielsen includes Blue Moon, Shock Top and Leinenkugel in craft; those 3 brand families collectively lost 0.2 of $$ last 4 wks. So rest of craft up 0.8. For sure, there are other factors, including AB and MC getting less price than in past. Competitive landscape changing lots in recent mos, but so far not in a way that favors either AB or MC.
AB in overdrive lately with various outreach efforts. Those include first and foremost its Nov 18 "Win Together" meeting with distribs in St Lou, but also ceo João Castro Neves Nov 9 interview at Beer Insights Seminar in NYC and even AB top brass meeting with trade media (INSIGHTS and competitor BBD) day before Nov 18 meeting. All these meetings had common central themes: developing much better working relationship with distribs, investing more in mkt and aiming to get back to volume/share/profit growth. Beginning its meeting with distribs, João said this is "a turning point in our relationship," adding it's "a new beginning" and "a chance for change." This meeting mainly about resetting relationship with distribs, not so much about specific brands and plans, tho it did debut new Bud Light packaging. Next up: its Jan 2016 SAMCOM meeting for detailed brand plans.
AB "worked closely" with panel to "build our future together" thru this new 3-yr plan, developed jointly with distribs for 1st time, João said. They met 12x in 8 mos, long, in-depth mtgs. João pointed to significant changes, all result of extensive give-and-take with panel: limiting branches to around 10% of volume, ending "born-on" dating, its new expanded voluntary incentive program and moving to more regional tests of brands. (For example, Bud Light Apple will only be in Ga and Best Damned Apple Ale will be in Ut and Mich.) Even on some thorny questions, like AB's increasing ownership of retailers thru various craft brewers it bought, and potentially disruptive effect of technology on distribution system, AB engaged in open dialogue with distrib panel, seeking common ground.
AB upped spending dramatically in recent yrs and it will add another $150 mil in incremental sales and mktg spend next yr, AB told distribs. Over last couple of mos, AB said Bud Light will get $50 mil incremental spending next yr, Michelob Ultra will get $100 mil in total sales and mktg spend and growing high end will get 20% bigger mktg budget. Then too, AB built out its high end business unit, hiring 300 people, João told INSIGHTS' Seminar "pretty much" from "scratch"; added about 1000 if you include craft acquisitions. Goose Island will be over 500,000 bbls and all AB's craft acquisitions are growing double digits, collectively at 3x the segment growth rate in recent mos. With investments, growing earnings will be a "big challenge," acknowledged João at Seminar, but "can be done....Luiz and team laid an amazing foundation" (ex-prexy Luiz Edmond) where AB became "a much more profitable business" and has "the size to invest more. Now is the time to invest," continued João. "We're committed to grow top line and bottom line," he said, pointing to recent sales/profit gains in Canada as example. Some US investments AB is making are "us playing catch up to a certain extent," said João, while others "are ahead of the curve." While AB "making progress" with distribs, it's "far away from where I think we can go," João said at Seminar. Old AB slogan was "making friends is our business," he reminded, adding: "We can bring some of that back." In relationships with others too. "When we talk about building relationships, it's not just with wholesalers," said João. Craft Brew Alliance "another partner that we could be closer to." Now AB and CBA "ending the year on a happier note" and "strengthening the relationship." Similarly in St Lou, João referenced working far more closely with NBWA on "common threats."
Revamped Voluntary Incentive Program New more "inclusive" VAIP, or voluntary AB incentive for performance program for distribs was a centerpiece of St Lou meeting. AB looking to get more "focus" and "performance" on its brands, said veep Bob Tallett. "Time to sell is under extreme pressure," noted Bob. Distrib sales reps today on avg sell 278 brands compared to 106 in 2007. Up more than 2.5x. But avg # of sales reps for distribs has only increased by a third, from 22 to 29. AB "not looking to place blame," Bob emphasized, but noting "complexity has increased." AB's current VAIP "outdated," AB said. Only 38% of distribs participate. With new VAIP, "there is something for everyone," said João. AB expects 70%+ of distribs will participate and get an avg 7x more benefits (about $200K on avg). Program simplified so wholesalers who qualify will get reimbursed from minimum marketing spend commitments. Benefits are much higher, starting at lower levels of alignment (98%, 95%) with new 3d level at 90%. AB tried to make funds available even to distribs whose portfolios less than 90% aligned. Distribs who score 850 on AB's Ambassadors of Excellence program, get 25% reimbursement of min mktg spend, regardless of % of volume that's AB. CBA brands aligned and Constellation aligned but latter only through Jun 2016. AB also will give 50% reimbursement to distribs with separate sales force for AB brands regardless of alignment. At 98% level, wholesalers can sell any small craft brewers 15,000 bbls or less or if they only sell beer in 1 state, covering over 90% of brewers, said AB. Another change: wine, spirits, NAs, don't affect a distrib's standing. Selling other brands outside AB territory disqualifies distrib from getting incentives. Tho many distribs remain wary, AB took significant step, trying to improve relationship.
AB Unveils 3 Yr “Win Together” Plan Developed With Distribs; A “Turning Point,” Sez João
AB’s Nov 17 “Win Together” meeting with distribs in St Louis is “a turning point in our relationship,” said AB ceo João Castro Neves, adding it’s “a new beginning” and “a chance for change.” Those were João’s opening words as he intro’d 3 yr plan developed jointly with AB wholesaler panel. AB “worked closely” with panel to “build our future together,” João said. During q&a session, several distribs on panel spoke of the depth of give-and-take and how AB and its distribs jointly developed plan in close, collaborative process that involved 12 long working sessions over last 8 mos. Immediate past-panel chairman Don Klopcic described his initial “skepticism” and how he gradually developed “hope that we’ve made a turn in our relationship.”
$150+ Mil Incremental Spending in 2016 Next yr, AB’s focus will be on four pillars of its commercial strategy: “elevate the core,” “win the high end,” “evolve the innovation model” and “win together attitude.” In effort to “win together,” and execute against those other objectives, AB will bring lotsa incremental resources to bear in 2016. Indeed, AB will spend an incremental $150 mil on mktg and sales next yr. It will spend an incremental $100 mil on mktg, including 17% more on core brands, 4% more on innovations and brands like the Ritas, and 20% more against its growing high end. AB will also spend $50 mil more on sales investments, including doubling its investments on premise. AB has gained share in tuff on-premise channel for last 9 months.
Revamped VAIP; Voluntary Incentive for Performance A major component of the meeting was a new more “inclusive” VAIP, or voluntary Anheuser Busch incentive for performance program. AB is trying to get more “focus” and “performance” on its brands, said veep Bob Tallett. The current VAIP has become “outdated,” AB acknowledged. Only 38% of distribs participate, down from 61% just 3 yrs ago. AB used to fund $15 mil, but that’s now down to $7 mil. And the average distrib only gets $30,000. To get the incentives under old program, a distrib had to be either 100% AB volume or greater than 97% AB volume. That “doesn’t reflect the realities of the marketplace.” Unlike in old 100% share of mind days, the word “exclusive” wasn’t used once.
Broader Reach; Increased Funds Available With the new VAIP, “there is something for everyone,” said João. AB expects that 70% or more of distribs will participate and they will get benefits that average $200,000. How does it work? The program will be simplified so that wholesalers who qualify will simply get reimbursed from their minimum marketing spend commitments. The value varies per wholesaler. So if a distrib is 98% or greater aligned (A+), it will get 75% reimbursement of its minimum marketing spend on an annual basis. If distrib is “A” level, at 95%, it’s eligible for 50% reimbursement. And even those who are 90% aligned, would still get 10% reimbursement. That 3d level is new.
Relaxed Restrictions; Accommodating Local Craft In addition to those enhanced elements of VAIP, AB tried in several ways to make funds available even to distribs whose portfolios are less than 90% aligned. For distribs who score 850 on AB’s Ambassadors of Excellence program, the benefit is a 25% reimbursement of their minimum marketing spend. That’s available regardless of % of volume that’s AB. Incidentally, CBA brands are aligned and Constellation aligned but only through Jun 2016. AB also will give 50% reimbursement to distribs who have separate sales force for AB brands regardless of alignment. And in concession to importance of small craft at the A+ level, wholesalers can sell all the small craft brewers they want provided they are 15,000 bbls or less or if they only sell beer in 1 state. And they won’t be counted against their % of aligned volume.
In another change, wine, spirits, NAs, don’t affect a distrib’s standing. But selling other brands outside AB territorial footprint disqualifies a distrib from getting any of these incentives. So a number of AB’s larger distribs won’t get VAIP benefits. A number of others are only 60% or so AB and unlikely to participate. Same for most who sell Constellation after June 2016. Etc. Yet AB did try to craft the VAIP to appeal to a much larger # of distribs.
Facilitating Consolidation AB also implemented several new incentives to facilitate consolidation. It will help finance deals where allowed. It will double the minimum marketing spend investment to consolidating wholesalers for 2 yrs. And at its discretion, it will allow distribs to have equity agreement managers with less than 25% ownership for a period of time.
“Encouraging” New Direction; Resetting the Relationship All of these moves taken together with an improved tone and enhanced dialogue showed AB headed in a new direction. Several distribs called this “encouraging” and “positive” during Q&A at the end. And another e-mailed: “At least they’re trying to build a relationship.” Privately, some distribs complained of high inventories again, but nobody brought that up during Q&A as if they didn’t want to rain on parade. Interestingly, very little said about actual business trends at this meeting. It was more about resetting the relationship, and offering a “framework” that can be built upon through the 3-yr plan. And tho there’s still mistrust in the network, and many statements along the lines of “proof will be in the pudding,” AB did take an early but significant step in improving its relationships and dialogue with wholesalers through this “Winning Together” platform.
New Bud Light Packaging Will Be “Revolution”; Gets Good Reaction AB didn’t yet debut new creative (that will be early next yr), but Bud Light veep Alex Lambrecht did say that 2016 “will be a revolution for the brand in 2 ways: the way we act; the way we look.” And so Alex did debut well-received new Bud Light look, with lotsa murmurs, folks snapping photos and applause. It’s first major package redesign since 2008. “We will seize the blue,” said Alex. “Bud Light is about blue,” which signifies “refreshment” and “drinkability.” Tho current Bud Light packaging already outperforms on the shelf, new package has even more “winning design” in terms of “findability,” “purchase intent” and “standout.” Recall, commercials will go back to Bud Light roots with humor and celebrities and “will shape the culture once again,” asserted Alex.
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Much of Pabst ceo Eugene Kashper's presentation and q&a at Beer INSIGHTS Seminar centered around this yr's Not Your Father's Root Beer phenom. It will probably total near 11 mil cases this yr, BMI estimates. Out of nowhere, mostly sold in 2d half and Pabst couldn't supply enuf product. In Jul-Aug, "supply was a big issue," said Eugene. "We didn't take full advantage of the opportunity," he added, "but we've got that fixed now." NYFRB is currently made in at least 6 breweries, including 3 City facilities, Wisconsin Brewing, Cold Springs and just starting with NAB.
Many ask if NYFRB is "sustainable," noted Eugene. Pabst thinks it can build on this yr's success. "This is truly consumer driven," Eugene said, adding "we really think it isn't a fad." NYFRB is #5 American High End brand in Nielsen for 4 weeks thru 10/10, Eugene showed, behind Ultra, Bud Light Lime, Bud Light Platinum Lager and Blue Moon Belgian White. It sells for by far highest price of any of 'em: $43.99 per case. Small Town's just launched Ginger Ale product is "very refreshing" and "much more drinkable" and therefore "potentially a bigger volume driver." Asked about NYFRB seasonality, Eugene said candidly: "I don't know. We've only had one season and we didn't have product." However "there's definitely going to be some seasonality" with fewer occasions for outdoor barbecues and "fun with friends." At presstime, INSIGHTS learned that distribs have widespread concerns about too much NYFRB inventory, especially on cans and kegs and that its trends have slowed lots just recently, tho that's not yet evident in scan data where it still grabbed 0.64 share of $$ in last 4 weeks thru 11/1 in IRI MULC.
Interesting to note that all of NYFRB's success so far done without any above-the-line advertising. Eugene doesn't believe in it, he said. Why not? "The consumers we want," said Eugene, "that's a negative for those opinion leaders. When you're banging them over the head every day, telling them what to do, telling them what to drink, they don't want that. We want those consumers that think for themselves," added Eugene, pointing to plethora of info available in internet age. One bit of info not available: calorie content of NYFRB. Asked about it, Eugene demurred: "We don't actually officially disclose that info, but we're planning to in the future. Many people view it as a dessert beer." What about that high price point? "Beer is super cheap" in US, especially "with the mix we have," said Eugene. "We need to stop selling ourselves short as an industry. We need to keep making better products, innovating, selling products at a higher price. And that's how we're going to take share from wine and spirits," concluded Eugene.
Interesting to hear where chief mktg officers David Kroll and Jim Sabia, from MC and Constellation Brands Beer Division, aligned on key issues as they spoke separately at Beer INSIGHTS Seminar. They lead two very different portfolios -- MC markets no Mexican brands; CBBD markets only Mexican brands -- but David and Jim share some basic approaches.
Gotta Be Consistent For Corona Extra, the "beach state of mind" message "has been consistent for 30 years," Jim pointed out. Many believe that's been key to brand's success: up for 27 of those 30 yrs and running up 13% this yr in latest IRI scans. Of course, campaign has "evolved," Jim noted. One insight from a coupla years back was message got "too literal." Constellation tweaked it so drinkers can expand occasions and "go off the beach." Now, beach can be "anywhere." David's also a big supporter of brand positioning "that can live for multiple years." Earlier in day, he pointed out that 9 straight years of growth in Coors Banquet is a "great testament" to "consistency in your brand positioning." MC has "stayed very true to model" on Banquet, so don't expect a "hard turn" on Banquet mktg; "it will stay firmly rooted in Western masculinity."
They Second that Emotion Even more than consistency, David and Jim stressed importance of "emotional connections." Indeed, that theme ran throughout David's comments, whether on brand building, taking occasions from spirits, you name it. "Consumers, especially in a digital word, need to identify with the brand," David said. Brands "need to stand for something," he insisted. For mainstream beers over last 10 years, much of that "true meaning" was lost, he believes. What followed was "brand after brand trying to entertain each other" and "we stopped talking about the quality of our beers and stopped building that resonance and meaning behind each of our brands." MC will now be talking about "quality and origin," and what David repeatedly referred to as the "face, place and story" behind the brands. Jim pointed out that a "beach state of mind," is really all about the "emotional connection" with consumers. Brands need to have a "rational, functional benefit." But "the way you get consumers into your franchise, the way you get new drinkers is that you emotionally connect with them." Number one attribute that consumers "play back" on Corona is "refreshing, said Jim. (Interesting, given importance of that notion in Coors Light mktg.) "But we don't have to talk about being refreshing. We don't have to talk about the functional, rational benefits, because the consumers give that to us. So we spend our time and energy on the emotional connection to consumers."
Packaging Matters David's big on brand "design." That includes "look, feel and touch of the brand you're holding," a "badge" element particularly important to millennials, he said. Also includes packaging, which has played key role in improved Lite trends. "Quality credentials of a brand and the pride factor" of a brand include "the actual graphics [which] need to echo what the brand is all about." MC has redone "trade dress" of Coors Light and David's confident "new packaging graphics will provide tailwinds." Then too, tho Blue Moon "killing it in the on-premise," as "orange ritual in the glass" provides "refreshing look, feel and taste expectation," brand has issues off premise. Consumers "describe our packaging as dark and weirdly mystical." So "you will see us renewing our graphics" to "mirror" on-premise experience. Another example of negative pkgng effect: "We probably got a little too cute with the packaging" on Fortune, as "consumers couldn't tell what it was" and "it was an almost anti-brand from a badge value standpoint." Then too, new packaging driving good part of Constellation's growth. Cans were only 2.5% of Corona mix up until last yr, Jim said. Now it's more like double that and growing, without cannibalization. Key was that until CBBD got full control of the brand, "we really didn't have control over any of the packaging graphics." (Modelo did.) Once they got control that "allowed us to simply change the graphics" from blue can to "look a lot more like Corona." With that change and $25-mil financial support, including 15-second ad running on lotsa football games, "it's working."
Distribution Matters Jim talked about importance of his sales background as being his "greatest foundation as a marketer." He illustrated one of "greatest challenges" for Constellation via visit to big NJ retailer that sold tons of Corona/Modelo, but gave more space to tiny brands that weren't "paying the rent." Taking advantage of distribution oppys is mantra whenever Constellation execs speak, including its chief mktg officer. Asked about distribs' role in mktg, David said they need to be "dead consistent on bringing [MC brands] to life all the way through" sales chain. "It's really building that brand world in a way that layers on to what we're doing above the line." Another issue: authorizations that don't get closed. "When we have authorizations, get the product on the shelves."
Molson Coors will hop into top 5 brewers globally following its purchase of rest of MillerCoors and Miller brands internationally for $12 bil from ABI. That's easily its biggest deal yet. Previously, its most important deals, forming Molson Coors and MillerCoors JVs, done without adding debt. So nothing to compare to this (TAP did buy Star Bevs, European brands for $3.5 bil in 2011). Molson Coors will total between 82-85 mil bbls. MillerCoors will be about 2/3 of volume, 64% of revs and 67% of oper income. TAP's volume will pass Tsingtao globally. At #5, only ABI-SAB, Heineken, C.R. Snow and Carlsberg bigger. Molson Coors will add approx $4.7 bil in revs and over $1 bil EBITDA "on a pro-forma basis," it said. So Molson Coors will generate $12 bil in revs and $2.5 bil in EBITDA. That's sure a big biz, but dwarfed by ABI, over 5X bigger in revs globally (before additional disposals). Here in US, ABI almost 2X as large in revs, but 4X as large in oper income. Its oper margin is 20 points greater than MillerCoors. Molson Coors still faces huge scale disadvantage in US that is risk factor if AB flexed financial muscle.
Yet deal appears to be a winner financially. Molson Coors expects deal to be 25% accretive to earnings in yr 1. It will get $250 mil a yr in tax savings for 15 yrs (not modeled by most in analyst community) with a net present value of $2.4 bil. And achieve $200 mil in additional synergies by yr 4 (lower than many anticipated). Even before tax benefits and synergies, EBITDA multiple of 11.5X far lower than for many other big beer deals, including ABI-SAB. What's more, Molson Coors has fine track record of cutting costs (over $1.3 bil in annualized cost savings since 2005), but less stellar record of growing its biz. This is a "game changing transaction," ceo Mark Hunter told INSIGHTS (and others), "game changing" in terms off "scale," "value creation" and "what it lines up for the company," he emphasized. Deal will make Molson Coors "stronger and more efficient" in North America and globally, Mark said on conference call. Deal also lacks "integration complexity normally seen in deals of this size," because Molson Coors already knows MC so well. Distributors too "will like this development," promised Mark.
But one key question will be how effectively Molson Coors will compete. Evidence of its head-to-head competition with ABI is mixed. Last couple of qtrs, Molson Coors losing share in Canada. In US, ABI volume trends about 1 point better than MillerCoors for most of the past 2 yrs. Both are declining and losing share to Constellation and craft. But MillerCoors is gaining share of premium lights in 2015. Its scale disadvantage recently reflected in AB sponsorships, like Bud Light in NFL and getting all 3 DC sports teams. Still many wholesalers cheer simplification of MC biz and welcome a bigger role for Coors family. MillerCoors chairman (and Molson Coors vice chairman) Pete Coors was reportedly frustrated by many aspects of MillerCoors. With Molson Coors owning 100%, he would now presumably have bigger say. Two of Pete's sons active in biz. Peter J. Coors is on Molson Coors board and is brewery manager at Shenandoah. His brother David is general manager of Molson Coors in Australia.
Following deal, Molson Coors will also have historically high level of debt. If the co finances 75%, that would be incremental $9 bil in debt, 5.1X net debt to EBITDA. Yet Molson Coors looks to retain its "investment grade" rating. One of principal ratings agencies, Moody's, already put Molson Coors "on review for downgrade" of rating. Why? Tho TAP has "solid brand portfolio," is "one of the world's largest brewers," with "solid market positions" in "major" mkts, and "stable cash flows" it's got "scale disadvantages" in US, reliance on "mature" mkts and "relatively small scale" which "tempers" rating.
Molson Coors also will get rights to about 2.7 mil bbls of Miller brands internationally, which generate about $70 mil EBITDA. That will be about 3% of Molson Coors global EBITDA and intl biz will be about 1%. Closing larger ABI-SABMiller transaction is a precondition of Molson Coors deal. Then the hard work begins. After "deleveraging," Molson Coors will look to "enhance" its portfolio, Mark noted. But "small bolt-on acquisitions" still could be part of Molson Coors "thinking" even in near term, he added, suggesting without stating that Molson Coors could still be in craft M&A game during transitional period.
Global company created by AB InBev purchase of SABMiller will be by far largest brewer in world, over 3x as big as #2 Heineken. It will sell about 530-535 mil bbls of beer, excluding SABMiller's US volume, compared to Heineken's "group volume" of 169 mil bbls in 2014, including associates/JVs. Co will also rank #1 worldwide in earnings among all consumer packaged goods (CPG) companies. EBITDA will be estimated $24 bil based on latest fiscal yr data, according to AB InBev. How big is that? That's $4 bil ahead of #2 Nestle and nearly 2X Coke and Pepsico. And it will earn 6x as much as Heineken, 10x as much as Molson Coors after it buys rest of MC. With $64 bil in revs, newco will be #4 in CPG-land, tied with Unilever, behind only Nestle, P&G and Pepsico. By the way, Newco is name of holding company created to buy SABMiller as "best way to merge UK and Belgian companies," ABI ceo Brito said. But so far "we haven't spent a second thinking about" naming brewing/beverage co that will result, he told INSIGHTS.
This is historic and altogether massive deal, but it ain't really about the US. Much more about Africa, where beer biz expected to grow substantially over next decade and ABI had virtually no biz. Key implications for US flow from simultaneously announced secondary deal: sale of SABMiller's 58% stake in MillerCoors to Molson Coors for $12 bil. (Details below.) Contrary to fears stoked in media by members of Congress and others expressing "concern" about potential impact on craft brewers' access, deal has no immediate impact on any current craft brewer or a single brand sold in US. Molson Coors will get every brand in MC portfolio, including Redd's and the imports, plus all rights to Miller brands sold internationally. Looks like ABI, mindful of what happened with Modelo purchase, wanted as "clean" and complete a deal as possible before taking it to the Dept of Justice. That won't stop Senators, attys, & advocates from asking for hearings, scrutiny, and more.
Deal Creates Another Stronger Competitor to AB in US There's a kind of double irony here. Most important impact in US: for 2d time in 3 years ABI did deal that simultaneously dilutes importance of US biz as % of global biz and strengthens key competitor here. Last one was purchase of Grupo Modelo. And just as Constellation became far stronger competitor to AB in US, Molson Coors/ MillerCoors likely to be stronger competitor here now too, certainly financially. Table below shows dilution effect:
| ABI 2014 | New Company | |
| US as Share of beer colume | 27.7 | 18.0 |
| US as Share of Revenue | 30.0 | 22.0 |
| US as Share of EBITDA | 32.5 | 24.9 |
In new company, biggest share of revs (33%) and EBITDA (40%) will be Latin America. North America comes next at 26% and 28% respectively. Mexico, Africa, Asia Pacific and Europe each between 8-13% of revs and 7-9% of EBITDA. SABMiller really gives ABI balance. ABI adding hundreds of brands globally. Unbelievably, it will have #1 or #2 brand in 24 of 30 largest global markets! Opens door for new brands to join AB fold in US (as long as they're not already here in MC portfolio). But with US a smaller part of global beer/beverage co, will that impact focus, investment and/or M&A strategy in US? As deal announced, Brito reiterated ABI's focus on top-line growth, including its continued commitment in US. AB has already said it will increase spending here in 2016. In M&A, AB bought 3 craft brewers in last 12 mos and has a couple more deals in hopper, we hear. Will that activity slow down as it tries to clear SABMiller acquisition with Justice?
What's the Next Big Deal? Things Go Better with Monogamy With its insatiable appetite, gotta already wonder what's next big deal for ABI in a few yrs. Perhaps Coke? ABI and SABMiller together sell about 100 mil bbls of soft drinks. HSBC analyst Carlos Laboy addressed this at Beer INSIGHTS Seminar, saying: "If I'm Coke I'm worried, because I'm next." ABI will be 2.7X net debt to EBITDA within 3 yrs after deal, Carlos figures. It will be 1.5X-2X larger than Coke. Given Coke's inefficiencies and operational weaknesses, "to me it's like Disney World for ABI." That's where AB "thrives," making money in those situations. In any case, "if I'm the Coca-Cola company one of the things I'm requiring is monogamy. The idea that ABI could be a Pepsi bottler in Latin America and the largest Coke bottler in Africa I think is going to be really tough for Coke to swallow. For us it seems like a pretty easy decision for ABI."
At presstime, clock is ticking on ABI and SABMiller's 3d extension from UK regulators for ABI to come up with formal offer. They now have thru Wednesday Nov 11 at 5 PM for ABI to make a formal takeover offer. Unclear how long these extensions can continue. Some of this extended dance seemingly has to do with adherence to strict UK takeover rules. But it's also the complexity of the deal, one of the largest of all time of any kind, clocking in well over $100 bil. Recall, after yrs of speculation, news of ABI's approach leaked Sep 16; they agreed on terms of a proposed deal Oct 13. But now almost a month later, still no formal offer. "SABMiller and AB InBev have made good progress in agreeing the terms of the Possible Offer which will be set out in detail in any announcement of a firm intention to make an offer," the cos said on Nov 4. Many speculate that ABI likely wants to announce disposal of SABMiller's 58% stake in MillerCoors to Molson Coors in conjunction with the larger deal. But there may be other holdups too.
On its quarterly conference call, Molson Coors (and MillerCoors) wouldn't touch possible deal with a 10-foot pole, declaring subject off limits right at outset. Investor relations veep Dave Dunnewald said: "Anheuser-Busch InBev announced yesterday, a further extension of its possible offer for all of the outstanding share capital of SABMiller and there has been some related press speculation that mentions Molson Coors. As a matter of policy Molson Coors does not comment on market rumors and we will not be discussing AB InBev SABMiller situation on our call this morning, including during the Q&A session at the end." Meanwhile, Molson Coors named David Heeds (its cfo in Europe) as new interim cfo. Gavin Hattersley will drop his dual role and become full time MillerCoors ceo.
So the waiting game continues. Everyone seems to know the outcome, tho it is interesting that SABMiller stock price hovers 10% below the possible offer. But "it's a complex deal so the extension isn't surprising," Eddy Hargreaves, an analyst at Canaccord Genuity told Bloomberg. "It may even be that they are seeking to say something positive about the disposal of the MillerCoors stake on the day of the formal bid."
Evolution of craft segment got more turbulent in recent mos, with conflicting signals. This yr's darlin', Ballast Point, filed to go public in Oct, including some truly screaming growth. It's up 123,000 bbls, 160% to 199,000 bbls for 9 mos. Got big profits too: oper income at $25 mil for 9 mos. And Ballast Point will possibly enter craft's top 10; was #27 last yr, showing volatility of segment. Its IPO would be yet another milestone in craft's current ascent. A long time since a craft brewer of any size went public. But could it also be the crest of a wave? Boston Beer reported "weakness" in its core Sam Adams brands in Q3, slower overall growth, lower future expectations. Boston's stock got whacked as analysts lamented lack of visibility into Boston's true trends. Sam Adams franchise down double-digits in Nielsen all-outlet for 4 weeks thru 10/24. This is craft scene right now: still good growth overall, wide variability in trends, and some big warning signs.
Craft is slowing down overall, according to virtually every source INSIGHTS has talked to in last 1-2 months. But IRI still showing strong double-digit growth off-premise. On-premise, craft gained just 0.3 share last 4 weeks in GuestMetrics data. And beer down over 5% in GuestMetrics data during same period while craft over 30 share of volume, 35 share of $$$. So craft almost certainly down in GuestMetrics data. GM doesn't fully capture tasting rooms, craft-centric bars or brewpubs. But that's still a big watch out and a slowdown from trends earlier in yr. Recall, Brewers Assn estimated 16% growth in 1st half for craft. But landscape markedly different now than even just a few mos ago. In fact, 3 of top 4 BA-defined craft brewers are likely to be down in 2015. Boston Beer up overall, but its Sam Adams franchise running down 4% in Nielsen yr-to-date. Yuengling down 3.5% for 9 mos. And New Belgium will be down for 1st time ever in 2015, ceo Christine Perrich told Impact mag. Those 3 are 25% of BA-defined craft. Don't know if that's ever happened before. Tuff for segment to continue to grow at a mid-teens rate with that much downward pressure. Several other larger, more established craft players are also growing slowly if at all. Craft Brew Alliance also just reported flat depletions for 9 mos, shipments down slightly. Local is king these days. Craft brewers are starting to eat their own, as one large metro distrib recently described it; most of his regional/natl craft brewers down this yr, while his local craft brewers are hotter than ever.
Meanwhile, many of fastest-growing craft brewers are doing transactions of one kind or another, whether IPOs, selling a stake or selling 100%. In fact, likely that 4 of 5 biggest bbls gainers in craft this yr will have done a transaction in last 12 mos: Lagunitas, Founders, Ballast Point and Firestone Walker. That's no coincidence. Only Sierra among biggest gainers will remain owned by the founder's family. While 3 of top 4 craft brewers will be down, those 5 fastest growers will collectively gain around 700K bbls. And the segment could still be up in neighborhood of 3 mil bbls in all this yr. Such growth disparities are getting more pronounced in craft segment.