The Interbrew-AMBEV Merger Story
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Case Code: BSTR137 Case Length: 20 Pages Period: 2002-2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization: Interbrew, AmBev Industry: Brewery Countries: Brazil, Belgium Themes: Mergers Acquisition and Takeovers |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
About Ambev
AmBev was founded in 1885. However, the company in its present shape was set up in 1999, when two leading Brazilian brewers - Companhia Antarctica Paulista and Companhia Cervejaria Brahma were merged to create AmBev. Like Interbrew, AmBev also expanded its operations through acquisitions. The company acquired 95.4% of the Uruguay - based company - Cerveceria Malteria Paysandu, thereby gaining 48% market share of the country's beer market. In 2001, the company bought over the assets of Cerveceria International, a brewery in Paraguay; increasing its market share in that country. In 2002, the company achieved a higher revenue growth by distributing two of the world's famous soft drink brands of PepsiCo - Pepsi Twist and Mountain Dew. The company expanded further in 2003 by spending US$ 40 mn on a brewery in Peru. In December 2003, AmBev acquired Cervecería SurAmericana, the second largest brewery in Ecuador. By early 2004, AmBev had a 65% share in the Brazilian beer market and a 17.2% share in the country's soft drinks market...
The Rationale
Both Interbrew and AmBev had strong reasons to merge. For Interbrew, it would mean access to the Latin American beer market, identified as a potential region for high growth, where AmBev had a dominant market share (Refer Exhibit IV for AmBev's share in the various Latin American countries). Two countries in the region - Argentina and Brazil - were particularly promising as beer consumption there had been growing at an annual rate of 5% over the past 10 years. Compared to this, the average beer consumption in Interbrew's major markets - Europe and the US -- was growing much slower. Further, given the trend of rapid consolidation in the beer industry, it was all the more important for Interbrew to firm up its position. Commenting on the deal and its benefits to Interbrew, James Williamson, beverage analyst at SG Securities , said, "There are very few targets of this size so although I think you will see consolidation continue in the brewing sector, it will be bolt-ons, nothing of this size...
The Merger Deal
According to the merger deal's terms and conditions, Interbrew would purchase a controlling interest in AmBev, by issuing its shares. For its part, AmBev would purchase the Labatt Brewing Company Limited (Labatt) - Interbrew's brewery in North America and Interbrew's 30% stake in Femsa Cerveza, one of the two leading brewing companies in Mexico. AmBev would compensate for this by taking over Labatts' debt of US$ 1.3 bn and by issuing additional shares to Interbrew. Though, it appeared on the surface that Interbrew was losing a minority stake to acquire a majority stake in AmBev, this was offset by the shareholders of both companies being provided equal importance in the functioning of the merged entity. This was named InBev. Thus, the deal seemed an alliance or partnership rather than an acquisition. After the merger, AmBev would have sufficient autonomy in its day-to-day business, the power to influence critical decisions in the group's affairs and the opportunity to further expand its business, domestic as well as geographic...
The Benefits
Several synergies and benefits were expected from the merger (Refer Table I). These broadly included financial benefits, a good growth platform and cost synergies. On the pro-forma 2003 basis, Interbrew and AmBev were expected to jointly earn revenues of € 9.5 bn and combined earnings before interest, taxes, depreciation and amortization (EBITDA) of € 1.271 bn. Interbrew's market capitalization at the time of merger was 9.977 bn and had been showing steady growth. In the past couple of years, Interbrew had reported an increase in revenue, net income, volume of beer produced and EBITDA...
The Drawbacks
Despite the optimism from company officials, analysts criticized the Interbrew-AmBev deal on several accounts. The deal was based on the principle of growth through acquisitions. Analysts felt that pursuing growth at any cost was not always beneficial. They felt Interbrew was keen to go ahead with the deal more because of compulsion to maintain its position in the industry. The company's financial performance had deteriorated significantly in the fiscal year 2002. While the company's revenues had fallen by nearly 4%, from € 7.303 bn to € 6.992 bn, its net income was down by a whopping 33%, from € 698 mn to € 467 mn in the fiscal year 2002. Though the financials improved in the fiscal year 2003, they were less than 2001 levels...
Exhibits
Exhibit I: A Note on the Global Brewery Industry
Exhibit II: Interbrew - Stock Price Chart(April 2002 - September 2004)
Exhibit III: Ambev - Stock Price Chart (November 2003 - October 2004)
Exhibit IV: Ambev's Market Share in Latin America (2002)
Exhibit V: Organization Structure of Inbev
Exhibit VI: Interbrew - Consolidated Statements of Income
Exhibit VII: Interbrew - Consolidated Balance Sheets
Exhibit VIII: Ambev - Consolidated Statements of Income
Exhibit IX: Ambev - Consolidated Balance Sheets
Exhibit X: World's Leading Brewer's by Volume Sales (2004)
Exhibit XI: Top Twenty Beer Brands in the World (2002)
Exhibit XII: Comparison of Interbrew - Ambev Key Financial Figures
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