Impact International / December 15, 2000
By Larry Luxner
SÃO PAULO, Brazil -- Last year's controversial merger between former beer rivals Antarctica and Brahma will likely drive down consumer prices in Brazil while unexpectedly giving Anheuser-Busch and other international brewers their first real presence in Latin America's largest and most populous nation.
American Beverage Co. (AmBev), with a market capitalization of $8.1 billion, now owns three of the top 15 beer brands in the world -- Brahma Chopp, Skol and Antarctica Pilsen. Together, they command a 68% share of the Brazilian beer market, which last year was estimated at 78.3 million hectoliters.
Yet AmBev hasn't had an easy time winning over skeptics. In late August, four AmBev executives were charged with having used inside information for their own benefit on the stock exchange. This only gave fuel to opponents of the massive merger, led by Humberto Pandolpho, president of Cervejaria Kaiser, which is jointly owned by Coca-Cola Co. and Heineken N.V.
"I think it's bad for the consumer," says Peter Carl Armstrong, a Rio de Janeiro-based independent beverage marketing consultant. "Brahma and Antarctica got away with forming this merger, which obviously constitutes a monopoly. It's put the other breweries in a difficult situation."
Nevertheless, a new report by Santander Central Hispano suggests that "the Brazilian consumer will most benefit from the new competitive landscape spawned by the merger." It points out that AmBev's mainstream brands, excluding Bavaria, have lost 17.7 percentage points of share since 1991, and that the trend will continue -- particularly if Heineken takes a majority stake in Kaiser, and decides to make its Pilsen brand a mainstream brand.
"The merger between Brahma and Antarctica not only represents the most aggressive consolidation effort to date in the Brazilian beer industry, but is also the eighth such M&A in the Latin American beverage industry over the last 12 months," says the Santander report, issued Sept. 15 -- the same day AmBev's ADRs began trading on the New York Stock Exchange.
"AmBev's task, to quickly combine a viable and strong beverage company, Brahma, with a financially distressed company, Antarctica, is a challenge," it says. "However, we expect senior executives and the majority shareholders to draw from their success in the Brazilian beverage industry. Given the experience of AmBev's current management and our assessment of the beverage industry environment, our financial projections call for a total of R$120 million in net financial and operating cost savings in 2000."
Under the conditions set forth by Brazilian anti-trust agency CADE -- which approved the sale -- AmBev must sell as a package five plants located in each of the five strategic regions of Brazil, as well as its Bavaria brand. Also, when AmBev seeks to shut down existing breweries as part of its "plant rationalization" process, it must retrain workers as part of the layoff process.
Santander estimates that of AmBev's 44 plants (post-Bavaria sale), three to five will be closed over the next 18 months, namely in northern Brazil, where Antarctica has many small breweries. All told, the synergy created by the merger will lead to R$600 million (around $312 million) in savings over the 2000-01 period; 50% of those savings will be in production, 29% in distribution and administration, 17% in finance and 4% in other sectors,
Robert H. Blocker, a São Paulo investment broker who specializes in M&As, says AmBev is the only Brazilian company with an important position in world markets, and the critical mass to make a difference.
"It'll now be easier for them to make the investments they need to keep up with the beer market, which is growing dramatically," Blocker said. "Even with a slow economy, the market for beer has been growing fast. If the Brazilian economy grows by 5%, beer will grow 10%."
In fact, Santander says AmBev's shares have appreciated by 52% since CEO Marcel Telles announced the merger in July 1999. Santander predicts an impressive 27% annual growth in EBITDA over the next three years. AmBev's ADRs are currently trading at $21 each; that's expected to rise to $27 per ADR over the next 12 months.
Alex Robarts, author of the Santander study, says AmBev will not save any money this year, because although the beer conglomerate will save $100 million in so-called "synergies" through combined operations, it will have to spend $100 million to comply with CADE's conditions, one of which is bringing Bavaria's market share up to 7% before putting it up for sale.
"The administration and financial costs are really the easier ones, where you can rationalize and pay off Antarctica's expensive debt," Robarts told Impact. "Production is where the bulk of synergies are, and that becomes a little tricky, because the government authorities -- given Brazil's high unemployment rate -- clearly aren't keen on an exodus of workers from 12 or 15 closed-down plants, so they've asked them to retrain employees."
Under the rules, AmBev must sell Bavaria and the five breweries to a qualified bidder at an auction scheduled for Dec. 20. The winner will have access to AmBev's distribution network for a four-year period.
Because bidders must have less than 5% market share, local brewers Kaiser and Schincariol are disqualified -- leaving international brewers like Anheuser-Busch, Labatt, Cintra, Interbrew and South African Breweries as obvious potential contenders.
Santander says it's betting on Anheuser-Busch as the likely winner.
"First, no foreign brewer understands the Bavaria brand more than A-B, as it was in a joint venture at the time of the brand's launch in August 1997," says Robarts. "Second, A-B has developed hands-on experience with the production and marketing practices of the Brazilian market through its joint venture with Antarctica, which included an equity stake and local production of the Budweiser brand.
"Third, with the purchase of the five plants and Bavaria, A-B can use its beer assets in Argentina, through its joint venture with CCU. For example, it can attack southern Brazil from its plant in Santa Fe. Southern Brazil, with its relatively high-income per-capita population, would be a good potential target market for premium exports from Argentina. Imported beer from Mercosur countries is exempt from Brazil's 20% import tariff. Fourth, as the largest brewer in the world, A-B has the financial muscle to endure the initial start-up phase that such a project would require."
Robarts adds that the AmBev merger has also prompted Heineken to consider increasing its 15% stake in Kaiser, now the second-largest Brazilian brewer.
Armstrong, the Rio-based beverage consultant, says rumors are floating around that Kaiser has been put up for sale, but that Pandolpho can't find a buyer. Armstrong, a former Brahma executive, also says Bavaria won't be worth much on the market either -- mainly because AmBev has allowed the brand to lose market share.
"Bavaria used to have a very strong campaign, but now it's been abandoned by Antarctica, since it was cannabilizing their own brands anyway," he told Impact."There are restaurants in Rio which still have tables with the Bavaria logo but don't serve the brand anymore. Bavaria has been abandoned long enough now that pretty soon, the consumer won't even remember it."