BREAKINGVIEWS-Budweiser brews some sobering mega-deal lessons

By Aimee Donnellan

DUBLIN, Sept 16 (Reuters Breakingviews) - Combining Budweiser and Miller Lite was an audacious and, ultimately toxic, concoction. A decade ago, Anheuser-Busch InBev ABI.BR under then-CEO Carlos Brito agreed to buy its closest rival, SABMiller, for $110 billion in a merger that created the world’s largest brewer. The ingredients used to do so, however, were unsavoury and now provide sobering lessons for other mega-deal mixologists.

Like many of its sprawling food and drink peers, AB InBev is wrestling with confounded consumers across the planet. Years of post-pandemic inflation and the anticipated effects of U.S. tariffs havereordered shopping priorities and eroded brand loyalty. Weight loss drugs are in; alcohol consumption is out. These broader trends have exacerbated the merger-specific challenges.

The takeover of Anglo-South African SABMiller, whose labels included Pilsner Urquell and Peroni, was part of a 3G Capital bender. The aggressive Brazilian investment shop embraced aggressive acquisitions followed by ruthless cost cuts using zero-based budgeting, a process that requires managers to justify all expenses starting from scratch each year. Brito’s glass was half full for a while. By 2019, he had delivered the $3.2 billion in promised synergies, one year ahead of schedule, and with $750 million more savings than originally planned.

It wasn’t nearly enough to cover the other spillage. For one thing, AB InBev was forced to top up its sterling-denominated bid when Brexit hit the British currency. Brazil’s real and Mexico’s peso swung wildly for a stretch, eroding earnings translated into U.S. dollars and making it harder to pay down greenback-denominated debt. With nearly 60% of its EBITDA derived from developing markets, Brito was forced to slash the dividend. And then the pandemic struck, bringing lockdowns that hurt sales and the bottom line. Sharp inflation created fresh hurdles. Ten years on, the enlarged AB InBev has shed 4 percentage points of EBITDA margin and is worth less in market value than what it paid for SABMiller.

Even more concerning, the alliance that touted “significant growth opportunities” from having a complementary distribution network and the ability to churn out new products for ale drinkers worldwide has lagged peers. A $1,000 investment in AB InBev on the day the deal closed would be worth just $660 today, including reinvested dividends. The same amount put into Diageo DGE.L, which produces Guinness, would now be worth $1,400 while backing the Danish Carlsberg CARLb.CO would have doubled an investor’s money and swelled to more than $2,800 in the S&P 500 Index .SPX.

Boss Michel Doukeris, who replaced Brito in 2021, is stuck with the extra-large stiff drink. One option for him would be to unwind the merger, as Kraft Heinz, the fellow 3G-backed deal dud from the same year, is now doing.

The two companies share similar traits. Both have suffered lacklustre growth. AB InBev’s sales have increased by less than 2% over the past two years and are expected to be flat in 2025, according to estimates gathered by LSEG. There’s clearly a limit to the benefits of size and sprawl. For Kraft Heinz KHC.O, however, the breakup is easier to do, even if value creation from doing so will be hard to achieve.

AB InBev spun off its Asia-Pacific business in 2019, which allowed it to raise nearly $5 billion and ease its debt hangover. There are no other obvious pieces to carve out that would deliver any sort of short- or even medium-term uplift.

Part of AB InBev’s problem, oddly enough, is that it’s just a brewer, without any sizeable product diversification to flog. Doukeris could try and sell the Asia-Pacific business, where volumes tumbled last year, and double down in faster-growing markets such as South Africa, which grew at a mid-single-digit rate last year. Another option would be to offload local quaffs and refocus even more on mega-brands than Doukeris is already trying to do, in part to recover from a Budweiser boycott over its partnership with a transgender social media influencer.

He also could invest more in the increasingly popular non-alcoholic segment, either with its own recipes or by acquiring a runaway success such as U.S.-based Athletic Brewing, backed by investment shop General Atlantic and beverage maker Keurig Dr Pepper KDP.O. Like an overexuberant partier, AB InBev cannot undo its past mistakes. Other revelling dealmakers witnessing the consequences, however, have a chance to save themselves.

Follow Aimee Donnellan on LinkedIn.