Impact / August 1, 2003
By Larry Luxner
BUENOS AIRES — Quilmes, Argentina's national beer, now has the flavor of Brazil in every bottle, so to speak.
Earlier this year, Argentine regulators approved a complex deal in which two of South America's biggest brewers will merge their beer and soft-drink operations in Argentina, Bolivia, Paraguay and Uruguay.
Under the arrangement, São Paulo-based Companhia de Bebidas das Americas S.A. (AmBev) is paying $342 million and relinquishing $180 million worth of brewing assets in four countries, in exchange for a 37.5% voting stake in Quilmes Industrial S.A. (Quinsa).
Quinsa is required to sell three minor brands comprising a 13% share of the Argentine market. That would leave the AmBev-Quinsa partnership with roughly a 70% market share— about the same as what Quinsa on its own enjoyed before the merger.
"It's a good way to continue growth and expansion with an enhanced product portfolio," says Frances Cressall, Quinsa's corporate finance manager. "It's not like we're trying to impose Brahma on the Argentine market. They were already a force in this market, so all we're doing is making an alliance between two existing brands."
Quinsa is a Luxembourg-based holding company that operates through its subsidiaries, principally Quilmes International Bermuda Ltd. (QIB). Its roots go back to 1888, when the original company, Brasserie Argentine, was founded in Paris by Otto Peter Bemberg. Two years later, Bemberg established a brewery in the town of Quilmes, just south of Buenos Aires.
Except for an eight-year period between 1952 and 1960 — when the government of Juan Perón confiscated the Bemberg family's Argentine assets — the company has grown considerably. Quinsa expanded to Paraguay in 1932, to Uruguay in 1965, to Chile in 1991 and to Bolivia in 1995.
Yet until recently, Quinsa was a fiercely independent brewer whose flagship brand, Quilmes, was as Argentine as the tango; at its peak, the multinational controlled more than 75% of Argentina's domestic beer market.
But gradually, competitors started making inroads into Quinsa's territory. In December 1994, more than five years before AmBev came into existence, Brahma opened a $150 million brewery in Luján, near Buenos Aires. The same month, Warsteiner inaugurated a $70 million plant at Zárate, also near Buenos Aires, to produce 1.2 million hectoliters a year of its Isenbeck brand.
Shortly thereafter, Compañía Cervecerías Unidas S.A. (CCU), the leading beer producer in Chile, acquired two Argentine brewers: Compañía Industrial Cervecera Salta S.A. and Cervecería Santa Fé S.A.
By the time economic disaster struck Argentina at the end of 1998, the beer market was seriously in trouble. Argentina's sudden rise in unemployment, culminating with a bank freeze and last year's massive devaluation of the Argentine peso — which had been pegged for 10 years to the U.S. dollar — caused beer sales to tumble.
In 2002, Quinsa's net sales plummeted to $468.6 million, less than half the $938.7 million recorded in 2001. About 75% of this decline can be blamed on the peso devaluation, though lower volume sales accounted for most of the balance. The company reported a net loss of $135.9 million in 2002, down from net income of $43.3 million in 2001.
Throughout this whole period, AmBev's lower-priced Brahma has been gradually stealing business away from Quinsa, eventually grabbing a 16% share of the market with its aggressive pricing strategies.
That's why Quinsa has decided to team up with AmBev instead of fighting it.
"In order to preserve the company, we had to join forces with a major player," Cressall told Impact during a lengthy interview in Buenos Aires. "Our strategy for growth typically had three legs. One was geographic expansion, the other was developing our own home market, and the third was related diversification, which is why we got into soft drinks.
"But because of a number of factors including lack of opportunities for geographic expansion and a recession in our home market, the opportunity for growth was becoming stunted. So a decision was taken to join forces in these five markets where we operate. This alliance with AmBev provided an excellent strategic fit for both of us."
AmBev is itself the product of a merger between Brazil's two largest brewers, Brahma and Antarctica. Commenting on the impending Brazilian mega-deal, Cressall told Impact back in 1999 that "they're creating a monster, a vehicle for international expansion" but predicted that "the merger won't affect us in the short term."
Yet by 2000, when the AmBev merger had been consummated, Quinsa was already looking at the new Brazilian giant as a potential partner rather than competitor.
With three of the world's top beer brands — Brahma Chopp, Skol and Artarctica Pilsen — in its portfolio, AmBev today commands a 68% of Brazil's enormous beer market.
To avoid creating a monopoly, however, Brazilian anti-trust agency CADE forced AmBev to sell as a package five plants located in five strategic regions of Brazil, as well as its successful Bavaria brand.
By the same token, Argentina's Comisión de Defensa de la Competencia has ruled that AmBev-Quinsa must sell the Lujan brewery, which has a capacity of 2.2 million hectoliters a year. It must also dispose of three smaller brands: Beickert, Palermo and either Imperial or Norte.
"The regulators' final decision ran very much along the lines of the Brazilian regulators," Cressall said. "As things stand today, the acquirer of these assets has to be a foreign brewer, one that is financially sound and with a good reputation, and we have to allow them access to our distribution network."
He added: "We would obviously like to keep everything, but we understand that regulations are regulations. Even so, we're still very enthused about the deal."
Not everybody shares that enthusiasm, however.
Heineken N.V., which since 1984 had owned a 15% stake in QIB, originally protested the transaction and even filed an injunction to prevent it from going through. But the Dutch brewer eventually came to an agreement with Quinsa in which it sold its 15% interest in QIB — 8.6% to AmBev and 6.4% to Beverage Associates Corp., which is the Bemberg family's investment vehicle.
Cressall said the idea is "that these two will sell their stakes back to Quinsa" at the end of a six-year period which expires in 2009. At that time, said Cressall, AmBev will have the option of receiving shares of Quinsa in exchange for AmBev shares at a ratio to be determined in the future.
Both AmBev and Quinsa are listed on the New York Stock Exchange; in addition, Quinsa trades on the Luxembourg Stock Exchange, while AmBev trades on the São Paulo Stock Exchange (also known as the Bovespa). Goldman Sachs & Co. acted as financial advisor to Quinsa and its controlling shareholders, while Lazard Fréres & Co. LLC acted as financial advisor to AmBev.
"The devaluation did not affect the AmBev transaction in any way," he said, noting that "sentiment is starting to turn in favor of the deal, in terms of analysts seeing the synergies." And despite protests about Argentine national patrimony, he said, "Quilmes is still Quilmes. and the Quinsa management team is still here."
Asked about the massive layoffs expected once the merger is underway, the 43-year-old beer executive wouldn't say how many of Quinsa's 4,100 employees would lose their jobs, but conceded that "there's going to be a strong rationalization" as a result of the deal.
"There seems to be possibilities for synergies in both markets," he said. "We haven't given out figures yet, but if you combine the EBITDA from Quinsa's and AmBev's operations in Paraguay, Uruguay and Argentina, we expect synergies to be 15% to 25% of the total. Today we're already saying it's going to be 30%. That's going to come from dumping two management structures."
By every measure, Quinsa is dwarfed by its much larger Brazilian partner.
AmBev brews a total of 62.4 million million hectoliters of beer, compared to only 12.3 million hectoliters for Quinsa. It also produces 19.3 million hectoliters of soft drinks, nearly three times the 6.8 million hectoliters produced by Quinsa.
AmBev boasts $4.715 billion in total assets, more than three times the $1.45 billion in assets held by Quinsa. AmBev also has $3.265 billion in total liabilities, compared to $605 million for Quinsa.
Finally, AmBev in fiscal 2001 reported $334 million in net income on net sales of $2.776 billion. Quinsa reported net income of $43 million on net revenues of $939 million.
In 2002, the brewery sold 7.62 million hectoliters of beer in Argentina, 1.68 million hectoliters in Bolivia, 1.40 million hectoliters in Paraguay, 431,000 hectoliters in Chile and 269,000 hectoliters in Uruguay.
"We've merged with AmBev's operations in this region," he said. "Today, they only have 37%. Once they've acquired control of Quinsa, if it happens, it'll be up to AmBev if they want to merge these companies completely."
Cressall suggested that the new entity would continue AmBev's strategy of pricing Brahma at 15% lower than Quilmes, which currently sells for 1.45 pesos per one-liter bottle.
In Bolivia, where Quinsa enjoys a 98% share of the beer market, business "continues to do very well," with 2002 net revenues of $88.7 million and operating profit of $28.9 million. That's up from net revenues of $86.9 million and profits of $21.3 million in 2001.
The Paraguayan market, on the other hand, "continues to be seriously affected by events in Argentina, as an increasing rate of devaluation for the guaraní helped prolong the recession." In 2002, Quinsa recorded net revenues of $57 million and profits of $12.2 million from its Paraguay operations, down from revenues of $82.9 million an dprofits of $29.6 million the year before.
Uruguay was hit even harder, with net revenues tumbling from $18 million in 2001 to $6.9 million in 2002. The company reported a $3.8 million loss in 2002, up from a loss of $600,000 in 2001.
In Argentina, by far the biggest market, net revenues fell from $437.5 million in 2001 to $171.2 million in 2002. Quinsa reported an $8.5 million loss from its Argentine operations in 2002, down from net income of $99.9 million in 2001.
In addition, said the company, "the soft drinks industry was also affected by the economic crisis, and to a larger extent than the beer industry. Quinsa's volumes declined approximately 4% during the fourth quarter of 2002, compared to the fourth quarter of 2001, in line with Quinsa's strategy of focusing on the Pepsi and Seven Up brands that grew 25.3% and 11.2%, respectively, over the same periods."
Despite the disappointing results, said Cressall, beer volumes in Argentina have recovered by 5% to 10% during the first quarter of 2003 after falling by 7% in 2002.
"The decline has certainly bottomed out, but we're not seeing robust growth yet," he told Impact. "The value of our company in the stock market has declined significantly, but we're seeing a recovery in the price of our stock, and a lot of investors are coming to visit us. If they think the worst is over, maybe it's a good time to buy."