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Brahma-Antarctica Deal Facing Sale Of At Least One Top Beer Brand
Impact International / February 1, 2000

By Larry Luxner

SAO PAULO, Brazil -- Six months after Brazil's two largest brewers shook up the global drinks industry by announcing plans to merge into one company, the unprecedented venture remains blocked by government anti-trust regulators and rival beer producers.

As a result, Companhia de Bebidas das Americas -- better known as AmBev -- still exists only on paper. Its proponents, No. 1-ranked Cervejaria Brahma and No. 2-ranked Cervejaria Antarctica, argue that by becoming one, the new entity "will be a Brazilian beverage company with the capacity to compete successfully in the global beverage arena and take advantage of global consolidation trends."

In a press release, the company says AmBev's strategy "is to utilize its Brazilian base of operations, as well as its presence in Argentina, Uruguay, Venezuela and exports to over 15 countries, in order to pursue expansion opportunities that will arise in Latin America as the continent's markets become more integrated with the creation of a Free Trade Area of the Americas by 2005."

Not everyone buys that argument, however.

"I think it's just a ploy to try to convince the government that big is beautiful," says one São Paulo-based liquor industry executive who used to work for Brahma.

The source, who asked not to be named, said creation of AmBev would allow Brahma and Antarctica to slash their respective advertising expenditures by half, without any noticeable drop in sales -- since most of their past advertising has been aimed at stealing market share from each other.

In 1998, Brahma's Skol was the world's fourth-largest beer brand, with shipments of 22.1 million hectoliters, up 13.9% from 1997. Brahma Chopp was the world's sixth-largest brand, with 1998 shipments of 20.4 million hectoliters, down 6.8% from 1997.

The world's 13th-largest brand was Kaiser (12.6 million hectoliters, up 0.5% from 1997), followed by 14th-ranked Antarctica Pilsen (12.5 million hectoliters, down 9% from 1997). Brazil's current per-capita beer consumption stands at 49.2 liters -- the eighth-highest in the world, and well over twice the world average of 21.5 liters.

According to the São Paulo business newspaper Gazeta Mercantil, Brahma and Skol together had 48.5% of the Brazilian beer market in 1998, followed by Antarctica (23.1%), Kaiser (15.2%); Schincariol (8.5%) and other brands (4.7%).

Based on pro-forma year-end 1998 figures, AmBev's total assets amounted to R$8.1 billion, and its net worth would have exceeded R$2.8 billion. Annual revenues would have stood at R$4.5 billion, while the combined entity would have sold 64 million hectoliters of beer and 25 million hectoliters of soft drinks.

If the merger is approved, AmBev will directly control 109 beverage brands, including 40 soft-drink labels, 37 beer brands, eight tonic brands, seven kinds of mineral water, seven fruit-juice brands, six malts and four tea labels.

"Brahma and Antarctica are convinced that AmBev is uniquely positioned to take advantatge of regional consolidation opportunities and economies of scale, while being better protected from the higher cost of capital associated with Brazil," the company said. "All of this will be to the benefit of consumers and shareholders alike."

Nevertheless, in mid-November, Brazil's Finance Ministry instructed the Cardoso government not to approve the merger unless AmBev sells off a number of assets including Skol, Brazil's most popular beer brand, which has a 26% market share. It said AmBev should sell the four breweries where Skol is produced, as well as distribution contracts for the brand.

Less than a day after the Finance Ministry issued its recommendation, No. 3-ranked Cervejaria Kaiser announced it would consider buying Skol for an undisclosed price.

"We recognize Skol as an excellent beer and an excellent brand, and as such, yes we are interested in evaluating the business," said Kaiser president Humberto Pandolpho, who has opposed the AmBev merger from the beginning.

Yet Kaiser -- jointly owned by Coca-Cola Co. and Heineken N.V. -- may not get its hands on Skol that fast. Both Brahma and Antarctica have rejected the Finance Ministry recommendation, expressing confidence that CADE, the government's anti-trust agency, would approve the deal without any restrictions.

"For AmBev, it was an unnecessary stance to maintain free competition in the market and harmful to the goals that led Brahma and Antarctica to associate," AmBev said in a prepared statement. "The sale of the Skol brand and assets would make AmBev even smaller than Brahma."

Other than that, AmBev has refused to discuss the merger with the press, saying the matter is for the government to decide. Neither Doris Wilhelm, an investor relations official at Antarctica, nor Vanessa Barion, her counterpart at Brahma, would elaborate on the deal when contacted by Impact in São Paulo.

The Finance Ministry insists on seeing its conditions met within six months after CADE approves the deal. The CADE anti-trust board has up to three months more to make a final decision on the merger after considering the report, along with recommendations from the Justice Ministry, consumers and Brahma and Antarctica's competitors.

On July 1, Brahma had a market cap of $3.9 billion, while Antarctica had a market cap of $271 million.

Meanwhile, a report on the controversy by Santander Investment says CADE may impose other conditions as well, such as requiring that a certain percentage of AmBev's net sales be derived from foreign markets over a specific time frame, perhaps five or 10 years.

At present, AmBev's international sales come to only 3% of total net sales for Antarctica and Brahma. This includes Brahma sales in Venezuela and Argentina, as well as Antarctica's export sales in the United States.

"To achieve a multinational status would imply obtaining a meaningful exposure to foreign markets. Thus far, Brahma's forays into Argentina and Venezuela have met with limited success," says Santander.

For most of its history, Brahma was owned and operated by several large families. Yet since 1989 it's been controlled by Banco Guarantia, an investment bank.

"Brahma used to export to over 20 countries. But when the bank took over, they backed out of most of that market," said the former Brahma executive, who asked not to be named. "I think they lost the boat a long time ago."

Says Santander: "Another expansion strategy for AmBev in the Latin American market could be through acquisitions. Here we see the options as limited, as most markets have viable and profitable brewers; this makes the bidding process relatively more expensive. Smaller opportunities include Leona in Colombia and Cervesur in Peru. We believe an acquisition would only occur in 2000 at the earliest, given management's present focus on the restructuring caused by the merger."

The brokerage firm says arriving at an accurate amount of potential net savings from the merger and gauging its impact on earnings is difficult, since AmBev's management is still putting the final touches on several aspects of the merger. These include establishing a clear debt policy; determining exactly which plants need to be shut down and setting the pace of the production rationalization process, and deciding which brands will ultimately remain in the product portfolio.

"Hovering over the merger process are questions concerning the final conditions to be imposed on AmBev from the regulatory authorities," says Santander. "Only one similar merger has taken place in Latin America -- the Backus/CNC transaction in Peru in 1994. Although this merger was successful, meaningful synergies only began 18 months after the deal was closed."

The bank suggests that CADE might allow the closing of Antarctica or Brahma plants, but that to preserve jobs, it would impose a staggered timetable spread over several years. To keep beer wholesale and retail prices competitve on a national basis, it might also require that Antarctica's beer distribution network remain separate from Skol and Brahma networks indefinitely, and that AmBev share or transfer marketing technologies with small brewers. Finally, in order to prevent dumping and/or aggressive discounting, CADE could increase price monitors and establish spot checks at points of sale, including supermarkets.

"The most obvious short-term concern for investors is how Brazil's anti-trust authorities will finally rule on the proposed merger," says Santander. "No matter what argument is presented to CADE, a basic risk remains -- that the ruling could take time, which could postpone the merger indefinitely. We suspect that CADE ultimately will allow the merger to take place on the condition that requirements to safeguard competition and create jobs are met."

When all is said and done, will the mega-deal actually go through?

"I don't think so," says Andy Castonguay, a São Paulo-based analyst for Pyramid Research. "They're going to have to do some serious spinoffs. To put together a company that'll control 70% of the beer market is clearly a monopoly. My guess is there are a lot of foreign hands in that pot. They're using a lot of xenophobic arguments."

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