Sab Miller

Background of SABMiller: * Founded in 1895 in South Africa as South African Breweries (SAB) * 1948-1994: bad effects from “apartheid” regime. The investments from and to South Africa were restricted. So SAB had to focus on dominating domestic market through acquisition of competitors and increasing the efficiency of production and distribution facilities. * By 1979, SAB hold 99% market share in South Africa and play the leading role in other markets in the region. * 1978 SAB acquired Sun City casino resort * In 1990s, SAB focus on expanding throughout Africa region.

The changing in South Africa political system (the establishment of multiracial democracy in S. A. ) made the progress easier * By 2000, SAB dominated the southern Africa, competition is lesser, but no room for expansion * In 1993, SAB acquired Dreher, Hungary’s largest brewery. This was the company first acquisition outside Africa. * In 1990s, SAB continued to expand to under-developed markets. In 1994, SAB formed a joint venture in China, China Resources Snow Breweries, and added China’s biggest beer brand, Snow, to its portfolio.

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After that were some acquisitions in Eastern Europe (Lech, Tyskie…) * By 2001, by focusing on emerging markets, SAB became the world’s fifth largest brewer by volume, with breweries in 24 countries across the globe. * In 1999, SAB listed on London Stock Exchange (LSE) * In 2002, SAB acquired a major brand in developed market: Miller Brewing Company, the 2nd largest in US. SAB then became SABMiller, the 2nd largest brewery by volume in the world. * In the first year operating SABMiller operating Miller, its US market share dropped from 19. 6% to 18. 7%. Miller’s product portfolio would be rationalization from 50 brands to 11 or 12. In 2003, the company made its first significant acquisition in Western Europe when it acquired Italy’s BirraPeroni. * In 2005, SABMiller merged with GrupoEmpresarial Bavaria, the 2nd largest brewer in South America. Latin America became the 2nd largest source of profits after South Africa. Anglo-South African brewing giant SABMiller is the world’s second-largest brewing company in terms of both market capitalisation and group revenues, behind US-Belgian giant Anheuser-Busch InBev. The company has a huge global footprint; it is present in: Latin America, Africa, Europe, Asia and North America via its MillerCoors joint venture.

The brewer has four global brands – Grolsch, Miller Genuine Draft, Peroni and Pilsner Urquell – in addition to a massive 192 regional brands. SWOT Analysis Strengths A diverse geographic footprint provides protection from demand downturns in specific regions/markets Massive emerging market exposure means the firm has access to underdeveloped, high-growth markets A vast range of local and international brands means that the company has multiple pricing points and can target consumers within different income ranges First mover advantage, and significant dominance in many operating markets gives the firm significant pricing power Weaknesses

While Asia contributes significantly to volumes, it does not to revenues or earnings meaning that the firm is not fully exploiting the potential of the Asian consumer A reliance on EMs, while good for growth, is not supportive of sales growth among higher-end, premium brands Opportunities

The company has a massive footprint in underdeveloped African beer markets and will enjoy first mover advantage there as the consumer story in the region develops Large scale M;amp;A would enable SABMiller to boost revenues and consolidate its position as one of the global brewing behemoths Even as emerging beer markets mature, premiumisation – as value sales growth takes over from volume – will emerge as another growth stimulant for the company Threats

Competition in EMs could undermine SABMiller’s dominance and certainly its pricing power in markets in which it was formerly dominant Government legislation, triggered by health concerns, or excise-raising initiatives, could undermine demand and impede growth For the lowest-income groups in EMs, formal alcoholic drinks channels remain discretionary and demand is thus severely negatively impacted by periods of economic weakness Strategy

Difficult to believe in an industry that has consolidated so rapidly over the last five years to the point where the world’s top five brewers control an estimated 50% of the global market, but another – potentially final – round of beer industry consolidation could be on its way. In spite of denials from the takeover targets themselves, over the last few months rumours have linked Turkish giant Efes, African major Castel Group and Australia’s Foster’s Group with possible sales.

SABMiller, as it seeks to keep pace with global market leader Anheuser-Busch InBev and to retain the robust revenue, volume and earnings growth momentum it had enjoyed up until late 2008’s global downturn, is likely to be at the forefront of this potential consolidation bout. However, competition for what is an ever-depleting pool of attractive takeover targets in the beer industry is likely to be intense and SABMiller will need to balance its mergers and acquisitions efforts with an ongoing organic push into emerging and frontier markets if it is to retain its dominant position and investor popularity.

Emerging Markets Strategy Dominating In Terms Of EM ExposureAlcoholic Drink Players – Emerging Market Sales Index (last financial year) NB BMI estimate based on geographic reporting and company statements. Source: Investor Relations | In BMI’s new Alcohol EMSI (Emerging Markets Sales Index), SABMiller is head and shoulders above its peers in terms of EM exposure. The company has a huge and diverse EM footprint and interestingly also very substantial frontier market exposure.

Arguably SABMiller would give most fast-moving-consumer-goods companies a run for their money in terms of how fast and successfully it has moved into EMs and this has enabled the company to ride the sensational EM demand story that has played out over the last 10 years or more. Of course, with EMs to remain growth outperformers, this geographic footprint continues to represent a massive opportunity for SABMiller. Significant also is the divergence between SABMiller’s regional sales breakdown in terms of revenues and in terms of volumes.

SABMiller’s early forays into high-growth EMs mean that it has penetrated markets with low existing per capita beer consumption rates. This has been a major driver of volume sales growth in recent years. However, even as consumption reaches more typical levels, these markets will continue to represent major growth opportunities as economy beer drinkers trade up to mass-market products and mass-market drinkers trade up to premium beers. This should place significant momentum behind SABMiller’s revenue and earnings growth in the years to come.

Pricing Strategy A Mixed BagSABMiller FY10 Volumes and Revenues by Region (%) NB Financial year ending March. Source: SABMiller Investor Relations | Nonetheless, there are barriers to realising these potential gains. SABMiller has enjoyed first mover advantage in many of the EMs in which it operates – it is one of the only brewers with substantial exposure to Africa for example. Its early forays mean that it has enjoyed a considerable degree of pricing power in these markets which has been earnings supportive.

However, as EMs crowd and global rivals expand in an attempt to re-weight their global portfolios, SABMiller is finding this pricing power – if not its leading position – under threat. This is already evident in South Africa. SABMiller controls some 90% of the local market and yet the local Heineken and Diageo joint venture has steadily managed to grow its share of the premium market at a time when interest in premium brands is building. Sustained expansion into EMs – even allowing for the fact that entry and expansion opportunities are increasingly hard to come by – will be vital in enabling SABMiller to offset this renewed competition.

It demonstrated its commitment to this strategy when it acquired Argentine brewer Casa Isenbeck in late November 2010. The acquisition leaves SABMiller a distant third in volume terms in Argentina and yet this could represent an important platform from which to continue expanding in Latin America and a vital tool in retaining its strong regional position. A flexible, nuanced pricing structure will also be a vital tool in enabling SABMiller to ward of EM competition. The company did manage to successfully pass on some price increases to its consumers in a number of its key markets in line with economic improvements in these markets.

However, it has matched this with a focus on low-cost beer in some of its more fledgling markets, particularly in Africa, which has been volume supportive. The massive breadth of the company’s brand portfolio has and will remain instrumental here – it has the ability to tailor its product offering very specifically to the needs of its target market; furthermore, it still retains the necessary degree of pricing power to successfully pass on some price increases. M;amp;A Strategy Despite having been an early frontrunner in terms of M;amp;A (most notable being its acquisition of Miller Brewing for US$5. bn back in 2002 and the US$7. 8bn purchase of Colombia’s Bavaria in 2005), SABMiller has been quieter in terms of M&A in recent years. Massive demand growth in EMs means it has managed to keep pace with its peers in terms of revenue growth, while its EM footprint means it has also remained an investor favourite. While Anheuser-Busch merged with InBev and Carlsberg and Heineken acquired and then divvied up the assets of Scottish & Newcastle, SABMiller has been more focused on its organic growth strategy.

We do expect this to change though and we expect SABMiller to go for either Castel Group or the beer assets of Foster’s Group in the near future. Both are a good fit. Taking over Castel (or more specifically Brasseries ;amp;GlaceriesInternationales (BGI), Castel’s African beer business) would certainly strengthen SABMiller’s pan-African competitiveness, turning it into a truly dominant African player and making it very hard for any latecomer to the market to gain traction. BGI is very well positioned in Angola, Cameroon and the Maghreb region.

If SABMiller were to close the deal, it would then be present in 36 of the 53 African countries. Then there is Foster’s. Taking over Foster’s would turn SABMiller into the market leader in a high-margin, high-consumption country, dramatically inflating the firm’s revenue outlook. Yes this would be at odds with an historic focus on EMs, but BMI has repeatedly stressed that a balanced portfolio, combining high-spending but lower-growth markets and high-growth but low immediate return markets represents the best chance of short, medium and long term success.

With both a good fit, necessity could also be a factor in SABMiller’s motivation. AB InBev continues to pare down the substantial debts it incurred during its merger and were it to re-embark on the acquisition trail – as its sustained circling of GrupoModelo suggests it will – SABMiller could suddenly find itself a long way back and with few remaining assets up for grabs via which to catch up. Conclusion |

We expect SABMiller to continue to drive growth throw three key mechanisms: * Continued push into EMs, primarily organic although snapping up smaller assets where available * Tailored differential pricing strategy, price increases where they can be pushed through, but economy push in lower-income markets * A return to large-scale M;amp;A via either Castel Group or Foster’s beer assets Increased competition and the threat of SABMiller losing some of its, until now, massive pricing power remains a risk to the company.

Price increases too could become problematic should demand weakness return in some of the markets in which SABMiller has to date successfully implemented hikes (although note that a hugely diverse portfolio does give the firm protection from this to some degree). A final risk we would note is the impact that excise rate hikes have had and will continue to have on beer demand in a number of SABMiller’s key operating markets – this has already been witnessed in Russia and Colombia, while regulatory challenges have also taken their toll in India.

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