Charles Glass Half Full: The end of SABMiller, but what comes next?
Behold the largest mega-merger in beer drinking history. But is it anything to drink to? By DIANA NEILLE and RICHARD POPLAK.
The deal of the century is all but done.
On Thursday, SABMiller Plc. shareholders voted to accept the passing of both the resolutions at the UK Scheme Court meeting and the SABMiller Meeting held earlier on Wednesday, in connection with the recommended acquisition of the iconic South African brewer by Anheuser-Busch InBev (AB Inbev).
If that sounds complicated, it’s probably because it was. The deal, which has been in the works since AB InBev made a bid in October, 2015, is valued at more than $100 billion (more than R1.3 trillion), and will form a beverage megalith that folds some of the world’s more recognised brands into a 28% share of the global beer market. Though supporters of the deal have got almost exactly what they wanted, there were some significant bumps along the way – the British Pound’s nosedive following the Brexit vote, and shareholder insurrection primary among them.
Over the course of the last few months, SABMiller fielded objections from a handful of shareholders, who insisted that the company’s £45 per share purchase price was undervalued, and that the deal privileged SAB’s two biggest investors – the Colombian Santo Domingo family and the US tobacco outfit Altria – over smaller players. (The two collectively own 40% of SABMiller plc.)
A British court ruled last week that neither Altria nor Santo Domingo could take part in yesterday’s single vote for SABMiller’s Scheme, although both agreed to be bound by the outcome regardless.
According to the broker Olivetree Financial, to railroad through with a two-vote structure would have “introduced an uncontrollable risk to the transaction and potentially increased the number of naysayers”.
This meant only 60% of the company could vote, with the law stating a quorum of 75% of shareholders would need to be present and voting to approve the deal.
“All of a sudden you had what was perceived to be a relatively straightforward vote turned on its head,” said Olivetree Financial’s Tyler Tebbs from London.
“You’ve excluded half of the company and voters have double the voting power. Compound that with Brexit and suddenly it seems the vote is a lot more complicated than you think,” he said.
“A very small number of shares could’ve threatened the deal. Up until yesterday there were people not sure where the vote was going to go.”
With the London Stock Exchange’s biggest merger in history now balancing precariously on the table, minority shareholders showed up to vote overwhelmingly in favour of the deal and, in an afternoon, a South African icon was absorbed lock, stock and two smoking barrels into the international conglomerate stratosphere.
So ends an era.
Once, South African Breweries was South Africa, a corollary that extended deep into the country’s colonial and apartheid-era culture. The company’s official corporate narrative begins with master brewer Charles Glass and his ubiquitous and much loved Castle Lager. In the mid-1880s, Glass founded the Castle Brewery, which in 1895 would become South African Breweries, and two years later the first industrialised company to list on the Johannesburg Stock Exchange.
The company engaged in a century-long cycle of binge and purge, slurping up rival breweries, bottling plants, soft drink companies, and major retailers, while establishing the Southern Sun Hotel Corporation. By the 1960s, SAB owned over 90% of the South African beer market. After liberation, the brewer entered its globalisation period, purchasing big names like Pilsner Urquell in the Czech Republic, a majority stake of Lech in Poland, a majority of the Italian brewer Birra Peroni and, most notably, the American brewer Miller.
But nothing lasts forever, and as of Friday, SABMiller will be delisted on the JSE in a deal so large that it will probably shift trading patterns on the exchange. (Financial analysts tie the recent steady uptick of the rand to merger fever.) According to Business Day, “SABMiller’s R1.3-trillion market capitalisation accounts for 8.6% of the JSE’s total and about 5.3% of the R24.3bn in daily trading.” Indeed, come October 11, when the company must comply with the terms of the US antitrust deal, there will be nothing left of SABMiller. No South Africans will remain in executive roles; the entire operations will be overseen by CEO Carlos Brito from Leuven, Belgium.
“Our assumption is that they will stick to their tendency to sort of slash and burn everything,” said Tebbs of a company that has a reputation for scorched earth cutbacks.
“Look at what they did to Budweiser: A big company, a lot of brand heritage. I don’t think they’ll be shy about bringing in AB Inbev’s best practices. It’ll be ‘our way or the highway’.”
The marriage of the two beer giants is a textbook case of massive, post-modern merger/acquisitions. The deal was never expected to run into any real antitrust objections in the United States or Europe, and certainly none in South Africa, which historically favours consolidations such as this one. There are, of course, conditions: the brewer will be forced to dump SABMiller’s 49% share of China’s favourite tipple, Snow, along with a combined majority stake in MillersCoors, and big names like Peroni and Grolsch, gutting the late SABMiller’s holdings by about half. That said, the newly enhanced AB Inbev will retain 45% of the market in the United States, and keep Bud Light, Stella Artois and other perennial favourites.
“Our combination with SABMiller will bring more choice to more beer drinkers,” said Carlos Brito in a statement, “ and extend the global reach of our iconic American brands, such as Budweiser — in markets outside of the US.”
But, insist the critics, that is not how mega-measures tend to work. According to The New York Times, craft brewers in the United States have been eye-balling the deal with terror, knowing that so-called “monopoly rents” – the profit reaped by a huge company when it has wiped out competitors that would otherwise help drive prices down – will distort prices and kill off smaller players.
Craft brewers in South Africa appear to be less panicked.
Where 11% of all the beer sold in the United States in 2015 was craft brewed, a burgeoning number of independent South African brewers share just 3% of the market, targeting a wholly different sector of imbibers: the affluent.
“Our market is not the guy who drinks 10 Castle drafts on a Friday night,” said Darling Brew owner, Philippa Wood.
“We have more of an impact on the wine industry than we do on the [mainstream] beer drinking market,” she said.
“Craft beer is in its own little category and it’s not necessarily affected by the commercial big guys,” said Khanyi Pupuma, owner of Ekhaya Breweries in Cape Town.
“What’s more exciting for me is that [the acquisition] has opened up the door for the local beer scene to rise up now as a truly 100% local industry, to grow according to the yardstick put in place by SABMiller during its tenure,” he said.
While the little guys in craft beer seem unfazed, the little guys working all the way up the value chain for a global beverage behemoth have had a lot more to lose. Over the last year, the union representing the 9,390 people employed by SABMiller has clambered to ensure it wasn’t forgotten at the southern tip of Africa by the boys’ club in Brussels.
After months of negotiations presided over by the Competition Commission, parties agreed to a five-year freeze on all jobs and a guaranteed payout for the beneficiaries of SAB’s B-BBEE Zenzele scheme, starting with an immediate, interest-free advance payment of around R32,000, according to Food and Allied Workers Union (FAWU) general secretary, Katishi Masemola.
“SABMiller shareholders are going to be paid out now, and we had wanted the same treatment. The union initially demanded that beneficiaries must be paid as part of the transaction at change of control,” said Masemola.
“AB Inbev pleaded with us to stay in the scheme until 2020, with an advance payment as a show of good faith on their part.
“FAWU got the best deal we can under the circumstances. Even if they cut the fat on top and rationalise management employment, the overall employment will stay the same,” he said.
But despite the five year breathing period – and an ostensibly better deal than he ever expected going into negotiations – Masemola was uncertain about the future of jobs for South African beverage workers. In addition to its beer holdings, AB Inbev is now also a 53% shareholder in Coca Cola Beverages South Africa, which employs a further 7,940 people nationally.
“This company is renowned for being ruthless when it comes to cost-cutting. To us that culture could mean that there could be depression on how wages increase over a period. Beyond five years they might look at retrenchment and rationalisation of employment.”
In 2015, Daily Maverick Chronicle undertook an investigation into worker exploitation at SABMiller’s soft drink division, Amalgamated Beverages Industry (ABI), and found that owner-drivers – the men encouraged to start independent, black economic empowerment-compliant businesses delivering ABI product – were often squeezed into bankruptcy by a corporate culture that came to rely on outsourcing as a means of reducing labour and other delivery-related costs.
So good riddance SABMiller? Not so fast. A fragmented beverage market would not necessarily benefit South African workers – small firms are often just as exploitative, if not more so, than big multinationals. And from an investment perspective, the wonks in the wood-panelled equity firms already consider South Africa to be in a chaotic spiral dive. The mining sector is in disarray, the manufacturing sector is evaporating, state-owned companies like Eskom and South African Airways are the epitome of dysfunction, while government, the federated unions and the private sector – all effectively in cahoots – value short-term plunder over long-term gain. In this milieu, SABMiller’s leverage was the stability they provided large institutional investors like the government pension plan Public Investment Corporation (PIC), the 10,000 or so jobs they provide work-starved South Africans, the tens of millions of rands they invested into “the democratic process” across the ideological spectrum, the tens of millions more they pump into sports and other social programmes, the billions they payed SARS at the end of every Q4, and the promise of comfortable board posts for politicians at the end of it all.
No one quite knows where the new company will fit into South Africa when the merger dust has settled. But AB InBev has not been known to hug after a rigorous bout of merging. However, if past experience is anything to go by, the future of Big Beer in South Africa will be significantly watered down. DM
Photo: Bottles of beer produced by AB InBev and SABMiller are pictured in London, Britain, 28 September 2016. EPA/HANNAH MCKAY