It’s been said that capitalism, by its very nature, is a permanent state of war. If that is true, then the big set-piece battles of that war are mergers and acquisitions, where “war chests” are accumulated, and “winners” and “losers” are declared, often after bitter fights for control of a company. So it was in June this year, when Anglo-African brewer SABMiller was widely declared the “loser,” having been outflanked by one of its rivals, the American giant Anheuser-Busch, when it won control of China’s Harbin Brewery from right under SABMiller’s nose.
For SABMiller’s CFO, Malcolm Wyman, the instant verdict on Harbin of many investment analysts and the media was familiar. For more than a decade, SABMiller has been engaged in battle, pursuing an aggressive strategy of growth through acquisition, a strategy that has faced questions and doubts at every step along the way. During that period, the company — formerly South African Breweries — has transmogrified from a small regional brewer, with annual sales of about 25 million hectolitres, into one of the world’s top three brewers, with sales of 175 million hectolitres and revenue of $13 billion (€10.8 billion) a year. Since 1999, SABMiller has delivered a total return for shareholders well above that of its rivals.
Along the way, Wyman developed what he describes as a highly disciplined M&A machine — “the SABMiller acquisition way” — to identify and execute transactions in the rapidly consolidating beer industry. He has lost count of the number of deals he’s done, but reckons none has failed. Yet, SABMiller is only just beginning to get the recognition for its deal-making prowess that Wyman feels it deserves.
“Coming from where we did, starting from such a low base, I think our credibility has had to be built brick by brick,” says the 57-year-old, who has been head of corporate finance since 1990, and became the company’s first CFO in 2001. Recounting all of the naysayers he’s had to deal with since the company embarked on the acquisition trail in the early 1990s, Wyman says, “We spend a lot of time with our investors, trying to explain a very complex business. We have tried to build credibility and, I think, we are now starting to get somewhere with it.”
However, the doubters persist, as the Harbin deal in China deal showed. Typical of the press coverage in June was the headline in The Times: “SABMiller loses battle for Chinese brewer.” Some observers lamented what they saw as SABMiller’s over-cautious approach. SABMiller had bought 29.4 percent of Harbin in July 2003 for $87 million, but had missed an opportunity to raise that stake, only to discover that Anheuser-Busch had grabbed 29 percent in May of this year. SABMiller’s belated full offer of $550 million for Harbin was topped by Anheuser-Busch’s $720 million, which SABMiller left unchallenged.
But did SABMiller, realising a profit of $124 million in less than a year, “lose” Harbin, or did Anheuser-Busch overpay? And were other factors at play that made it prudent for SABMiller to step away?
The Harbin deal is a small illustration of a bigger challenge for SABMiller, and more generally for all those assessing the merits of merger and acquisition deals: is there a “right” price? How do you measure success or failure? Does strategy trump price? How do you ensure acquisitions add value? (See “An Imperfect Measure.”)
This “intellectual challenge” is what convinced Wyman to make the jump from Johannesburg-based UAL merchant bank to SAB in 1986. “I’d been doing M&A deals in South Africa for a number of years, going from one deal to the next. From an investment banking point of view, it adds value to just do the deal and get the revenue. I wanted to see if I could handle it from the other side, make sure that the company had the necessary disciplined approach in place to turn that into a value-adding acquisition.”
Out of Africa
At the time, it seemed an unlikely springboard from which to launch a bid to be a top player in one of the world’s oldest industries. SAB was locked behind the walls of apartheid with no access to world markets. What’s more, it had lost many of its other African assets during the period of nationalisation on the continent in the 1960s and 1970s. It had become a local mini-conglomerate, with interests ranging from glass- to boot-making, and Wyman’s early work involved unwinding these disparate interests.
But SAB made a virtue of its isolation, becoming a monopoly at home (it still has 98 percent of the South African beer market). Then, two world-historic events converged to open new horizons for the company: the apartheid regime crumbled just as post-communist markets were opening up in the early 1990s. Wyman recalls how SAB put together “a vision, rather than a definitive strategy,” to become one of the major international brewers. “How we would get there was not that clear — there are some things you can’t put down in writing.”
In particular, Wyman knew there were restrictions on exporting capital due to South Africa’s exchange controls. So SAB focused on making inroads in relatively cheap markets: “Less sophisticated, perhaps with opportunities to start things from grass roots and turn them around,” he says. “We had done that in Africa so we were more used to that perhaps than our competitors were. We made a virtue of necessity.”
So, the grand strategy was set. But many over-ambitious companies with grandiose goals have crashed and burned. Cordiant Communications comes to mind, having tried to elbow its way into the big leagues of advertising and marketing services in the 1990s through aggressive acquisition. Its equity value was a mere £10 million ($17.8 million) when the debt-laden company was sold in 2003 to WPP. The key for Wyman was to maintain financial discipline on each transaction, to set benchmarks and stick with them. That was tricky for early deals like Dreher in Hungary in 1993, SAB’s first in Europe, and a series of purchases of denationalising breweries from Zambia to Poland and from Tanzania to Slovakia.
Of the push into central Europe in the mid-1990s, Wyman recalls how the company’s cost of capital was a lot higher because risk was a lot higher. “A lot of people were considering whether or not those countries would succeed in moving out of communism or would they fall back into some form of extreme socialism or communism,” he explains. “Secondly, our work showed that we could probably pay something of the order of $45 to $50 per hectolitre for an operation fully repaired, so if we had to put more capital into them that would be included.” Over time, he says, SAB believed that those assets would become worth anywhere between $100 and $200 a hectolitre, as indeed they have.
The principal internal benchmark for evaluating acquisitions (or partnerships) is project-weighted average cost of capital, differing for each country depending on risk, says Wyman. Having modelled what it thinks the company can do with the assets by bringing efficiencies, the M&A team benchmarks that against all other operations in similar countries. It then measures whether or not it meets the weighted average cost of capital, and whether it can become EVA-positive within three to five years.
Emerging market ventures are expected to have a “saucer-shaped result,” whereby money is invested, initially profit goes down as breweries and headcount are cut, then there is a sharp recovery from year three or four. Demographics in central and eastern Europe — including a strong move away from spirits to beer among the affluent young — meant positive results generally came earlier and stronger than had been expected.
It was during the period from 1993 to 1998 that Wyman, together with his chief executive, Graham Mackay, put in place a formalised system — “the SABMiller way” — for assessing and executing its many transactions. Four regional steering committees were set up — North America, Europe, Africa and Asia (it was decided from the outset that South America already had too many international brewers present to be interesting) — all jointly chaired by Wyman and Mackay.
The M&A teams take a top-down approach for each country, analysing the economy and demographics, their affect on the beverage industry, details of all the brewers in the market. The procedure continues down to fine details of the technical, commercial, financial and legal functions. It is what Wyman calls “a living document,” necessary to bring discipline to a deal process that was accelerating and growing more complex. It allows him and Mackay to make decisions based on overall strategy as well as individual deal merits.
In late 1999, a few months after SAB moved its primary listing to the London Stock Exchange from Johannesburg, came the seminal deal that Wyman says boosted confidence in the company’s M&A process. SAB agreed a two-stage purchase from Nomura of the Pilsner Urquell and Radegast breweries for a total $629 million. The annual sales of 8 million hectolitres gave SAB a 44 percent share of the Czech market and bumped regional production to 17 million hectolitres. It also gave SAB control of the historic Pilsner Urquell brand, which it planned to develop as a premium international beer. But many observers said SAB had overpaid, at 14 times Ebidta, or $79 a hectolitre. Part of this perception was due to the “star power” of Nomura’s top deal-maker, Guy Hands, although he was not directly involved in the deal. It was assumed that the bankers had put one over on the brewers.
“That caused us a wry grin because we had spent more time on this than any other deal,” Wyman says. Indeed, the M&A team spent two years analysing every aspect of the Czech market. The sceptics — and perhaps Nomura — hadn’t considered that the two Czech breweries had been waging a fierce price competition, and that with facilities at either end of the country they had duplicate distribution systems. “There were huge synergies we managed to get out immediately,” says Wyman. Furthermore, “this country, which drank the most per capita, was selling beer at the lowest level in relation to its disposable income of any country in central Europe and we didn’t believe this was sustainable.” Since the purchase, sales volume has risen to 9 million hectolitres, market share to 47 percent, price increases stuck, the market skewed towards the premium brands, and there was even a boon from the exchange rate. The business has “far exceeded anything we expected” in terms of return on capital.
Now, the battle has moved onto a different level. Earlier this year, in their annual review for shareholders, Wyman and Mackay declared that the first stage of consolidation of the world beer market, where big established players gobble up under-performing local brewers, is pretty much over. Internally, in fact, they saw this stage drawing to a close some years ago. In late 1999 and early 2000, Wyman says M&A analysis suggested that the smaller opportunities were fewer and further between. The second stage of consolidation — where there would be nil- or low-premium deals between relative equals — would soon commence.
Deals were getting bigger as Bass Breweries in the UK became a target. SAB backed away, and Bass fell to Interbrew, the Belgian giant, for £2.3 billion in late 2000. Interbrew then faced a protracted, and ultimately unsuccessful, fight to keep regulators from breaking up the acquired brands, including Carling, the number-one brand in the UK, which went to Coors.
Meantime, in early 2001, Mackay met his counterpart at Miller Brewing Company, John Bowlin. Miller was a neglected subsidiary of Phillip Morris (now Altria), and its performance had been declining for years. Rumours swirled throughout the year that there would be a three-way merger between SAB, Miller and London-listed Scottish & Newcastle — a perennial takeover target. But despite the fact that Scottish & Newcastle was the cheapest of the large brewers (with a price/earnings ratio at the time of ten, or half that of the industry leaders), it wasn’t the kind of turnaround opportunity that fitted SAB’s expertise.
Miller’s owners eventually backed SAB management in June 2002. “They had had approaches, but we offered them the exposure not only to the turnaround in Miller but the ongoing growth in our operations,” Wyman recalls. Altria agreed to an all-share deal valuing Miller at $5.4 billion — the largest deal to date in the brewing sector — leaving Altria with a 36 percent interest in the new SABMiller.
Miller, though the number-two brewer in a developed market, took an unwelcome “saucer-shaped” path, as sales and market-share continued to decline, and early non-beer product launches failed. Detractors again thought SAB had bitten off more than it could chew. But Wyman says that six months in, when targets weren’t met, there was a ruthless cull of Miller’s management. A fair wind then blew, in the form of the low-carb diet craze, which last year boosted sales of the flagship Miller Lite brand and brought MBC back on track.
The Miller deal fired a shot across the bow of Anheuser-Busch, which had become complacent as owner of the world’s strongest beer brand and a 40 percent+ market share at home. Then earlier this year, in the second of the industry’s “second phase” deals, Interbrew beat Anheuser-Busch to gain control of the Brazil-based Ambev, which has 63 percent of its home market — the world’s fourth largest — and is one of the world’s top ten brewers by volume. The deal — which Interbrew insists is a “business combination, not a takeover” — values the Interbrew-Ambev group at $12 billion, in which Interbrew gets a 57 percent economic interest and 85 percent of the voting shares.
Into the Fray
The Interbrew deal follows the appointment in September last year of Francois Jaclot, known as a deal-maker at French utility Suez until he was forced out by the board when priorities changed. This year, Jaclot has been busy telling investors that Interbrew’s M&A system — “the Interbrew way” — is a “core competency” of the company. Jaclot has one man in charge of his M&A team, Gauthier de Biolley, who used to run international M&A at Vivendi Universal. Interbrew emphasises a system whereby the integration team “questions and challenges” the M&A team’s assumptions, and can reject deals, and where the integration process takes 100 days or less. Jaclot particularly has put a sharp focus on return on invested capital (ROIC) and has promised to raise the Interbrew weighted average from 7.5 percent to 10 percent by 2006, after Ambev is integrated..
Meantime, Anheuser-Busch, when asked about its M&A strategy in this turbulent beer market, prefers not to discuss details, saying it is “proprietary information.” Which brings us back to Harbin and some of the mystery that still surrounds that deal. With the M&A machines revved up at SABMiller and Interbrew, and with two shots fired across the bow in its own backyard (even before the July announcement of the $4 billion Coors/Molson tie-up), industry thinking is that Anheuser-Busch was keen to go on the offensive internationally. Where better than China, which surpassed the U.S. last year as the world’s largest beer market by volume, and is growing at up to 8 percent a year? Anheuser-Busch owns 9.9 percent of the country’s largest brewer, Tsingtao, but SABMiller is the most established in the country, with a 49 percent stake in the country’s number-two, China Resources Brewing, and has a good track record since arriving in 1994.
With Harbin — the first ever contested bid for a mainland Chinese company — it was never a simple question of price. SABMiller undoubtedly wanted Harbin in order to double its market share to 60 percent in China’s northeast province, but Harbin’s management, despite entering into an “exclusive” strategic agreement in 2003, was always wary.
It was never made clear why Harbin’s five top directors decided not to exercise an option that would have required SABMiller to pay them $110 million (or HK$9.40 a share) for a stake they paid $5 million for in 2003, and instead pushed for Anheuser-Busch’s offer of HK$5.58 a share.
Meanwhile, Harbin city government sold its 29 percent stake in the brewer earlier this year to a British Virgin Islands blind company, the beneficial owners of which were never determined. Anheuser-Busch bought that stake, and made a simultaneous $8 million contribution to Harbin city’s development fund. If this is included in the deal cost, it pushes the price to double the average of recent foreign acquisitions of Chinese breweries (inflated by Heineken’s recent record price).
Such are the complexities of doing deals in emerging markets. But whether or not Harbin is ultimately deemed a successful acquisition for Anheuser-Busch, and a lost opportunity for SABMiller, is part of a larger picture. Wyman is comfortable with the decision not to bid up Harbin and reckons it‘s that kind of discipline that has transformed the company from small African outsider to global heavyweight contender. As it passed up Harbin, SABMiller bought two brewers in Anhui province, paying about $12/hectolitre, Wyman notes.
“Harbin was just one asset and every asset has a value,” says Wyman. “If we got carried away, buying at auctions or tenders like that, we could have overpaid for everything. That is one of our strengths — knowing when to walk away.”