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September 2017

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« Learning from Monster | Main | Insights into SABMiller, Heineken and ABI »

Holy Guacamole! The giants are dancing again.

Interesting news over the weekend… SABMiller made a “hey, let’s get together” offer for Heineken and ABI might be lining up financing to make a run for SABMiller. 

I had planned for this post to be more about the Monster move… but that will have to wait… although Monster offers a painful lesson in the realities of big business and the strength of things like “I thought”… and “I was told”… and “I assumed”… and “they promised”.  Value of those things?  About zero.  Something to keep in mind as this all plays out.

But what about the renewed dance of the giants?  Many have noted how life is often just like a country music song… or is it the other way around? ;-)… but this is better described by a song from a one-hit-wonder band, The Georgia Satellites… Keep Your Hands to Yourself.  To enlighten my younger readers… here are the lyrics

 I got a little change in my pocket going ching-a-ling-a-ling

Wanna call you on the telephone, baby, give you a ring

But each time we talk, I get the same old thing

Always, "No huggee, no kissee until I get a wedding ring"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

Ooh, baby, baby, baby, why you gonna treat me this way?

You know I'm still your loverboy, I still feel the same way

That's when she told me a story 'bout free milk and a cow

And said, "No huggee, no kissee until I get a wedding vow"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

You see, I wanted her real bad and I was about to give in

That's when she started talking about true love, started talking about sin

I said, "Honey, I'll live with you for the rest of my life"

She said, "No huggee, no kissee until you make me a wife"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

The song can be seen at https://www.youtube.com/watch?v=PdpAop7gp0w if you really want to get the feel.  I have to admit I get this silly image of Brito, Boxmeer, and Clark filling out the various (and changing) roles in this music video. 

But back to my tale… both ABI and SABMiller have a little change in their pocket, and I assume it’s going ching-a-ling-a-ling.  I assume all currency, regardless of its type, makes the standard ching-a-ling-a-ling sound.

SABMiller decides they want to get a little action – if you know what I mean ;-)… or do they just want to run from ABI and their love of Heineken is of a temporary, yet urgent nature?  Regardless, they give Heineken a ring and plead, “my honey, my baby, don’t put my love upon no shelf”… But Heineken gives them the cold shoulder with a strong, “don’t hand me no lines and keep your hands to yourself.”

Now SABMiller, who fear ABI is going to grab them by the hair and drag them into the nearest cave, respond with a “Ooh, baby, baby, baby, why you gonna treat me this way?  You know I'm still your loverboy, I still feel the same way”.

Much like the old serial movies, stay tuned to see if the spurned lover can overcome his sweetheart’s admonition to keep your hands to yourself.  A bigger and bigger diamond ring can melt even the most reluctant business heart… just ask AB shareholders ;-).  And more importantly, the senior management at AB.

And onto ABI… why does SABMiller fear their loving embrace?  Don’t they too have that loving feeling? – OK, too many song references will only burden this so far delightful little post.

From my cynical observation of large public companies, they are run solely with 2 goals in mind… first to enrich the present senior management (the folks who set around the table and make the big decisions) and second, to keep the stock price up.  The second’s sole goal being to ensure the first goal can be obtained.   Sorry, but that’s it. 

Most large organizations; public companies, unions, government, whatever, end up being operated for the benefit of those who run the place… not necessarily the same as those that own the place… or the members of the organization.  These poison pill maneuvers reek of a senior management self-protection racket.  Of course all wrapped in motherhood, apple pie and doing what’s good for the shareholders… yeah, right.

Does SABMiller want to purchase Heineken for the sole purpose of becoming “too large” for ABI to swallow?  To whose benefit is this?  AB tried the same thing when InBev was pleading for them to not “put my love upon a shelf”.

How did InBev overcome this reluctance?  Yeah they raised the offer price a little, but mainly they agreed to allow the senior management (the decision makers) of AB to reward themselves like Saudi princes.  Once they had lined their pockets with more than a little ching-a-ling-a-ling… it was amazing how they welcomed InBev into their boudoir… no more keep your hands to yourself.  What was once a terrible idea for shareholders suddenly became a great idea for shareholders… once enough promised silver had changed hands.

Cynical yes.  True?  Sadly yes again.

Our InBev friends (now ABI) have proven themselves very good at deal making so I certainly wouldn’t bet against them in their run for SABMiller.  The international brands/footprints work pretty well and if ABI can’t make deals happen, they’re stuck with just running the dang things… and that’s a lot harder to do… and doesn’t offer nearly the rewards to THEIR senior management for a little extra ching-a-ling-a-ling in their pockets.  The AB deal put more than a little ching-a-ling-a-ling in their pockets… what was it?  Only about $2,000,000,000 or so for a very small group of individuals.  I’ll do deals every day for that type of ching-a-ling-a-ling.

Just like those country music songs, it all comes down to ching-a-ling-a-ling and spurned (and not spurned) love… basically what’s in it for me?

Now after 900 words (and beating an old song to death), what does this mean for US beer distributors?  Harry reports that even if the ABI/SABMiller deal happened, it would mean little to wholesalers.  I profoundly disagree.

This deal will be driven by international positions and the US is a minor part of these calculations.  Beer distributors keep that in mind.  The US isn’t driving this potential merger; from a decision-making viewpoint it is small potatoes.  It is a headache, but one that can be managed.  And to repeat myself… yes the US market is a great cash cow but it is also a pain in the rear from a supplier perspective. 

We already know how the businesses are performing under current ownership. Dumping/spinning-off all or parts of the US market at the right price is not necessarily a bad idea, especially if the business is likely to sell for more than it’s worth to the present owner.  Even if ABI could add value, it’s not too far-fetched that the businesses could become structurally less attractive in the US. 

If they finally agree to take that love off the shelf, they will make the US market work one way or the other.  And anyone who is telling you how it will all shake out in the US is simply telling stories.  No one… and that includes the present players on all sides of this... can tell you how the US will shake out.  There are far too many moving parts and far too many players… both known and unknown.

With this move, and the continued 3-tier and franchise erosion driven by the craft folks, we could see a profound remaking of the entire US beer distribution system.  Remember things are always like they’ve always been right up to the moment they aren’t anymore.

And don’t let the present Justice Department and its anti-trust positions give you any false hopes… most likely it will be the next administration who would ultimately agree to these actions… and they may take a far different stand than the present one.

For you unconsolidated Miller Coors distributors…could you be holding a structurally unattractive business that would provide a lesser rate of return?  You’re playing roulette, and I’m afraid it might be the Russian kind, especially for the medium to smaller volume distributors.  Take your chances if you like but with these potential changes of ownership, where do you stand?  And if it happens, the odds of what would legally be described as “change of ownership” are very high indeed.  One of you saps, if not both, will be heading to the exit.  You might go “baby tantrum-style” - a style I personally know well ;-) but you will go.

Only a handful of states have franchise laws that protect distributors regardless of almost anything… where you will stand if this happens is determined by the state you’re in.  But you might be facing a situation of bye-bye brands (and effectively your business) with the only argument being what fair market value is.  Who knows, perhaps Coke goes farther than Monster and tries to pick up the entire beer distribution bus?  Does anyone really think they couldn’t run it?  It might just be how much it costs to get it.

We may find that pretty much every wholesaler is playing roulette… and all they can do is cheer for the ball to ultimately fall in the right slot.  MillerCoors, Molson Coors, ABI, Heineken, Coke and Pepsi, Pabst, Boston Beer, Constellation, some of the other larger craft brewers… all might willingly or unwillingly join the party.

Rather than being a non-event for beer wholesalers since we all know how it will go in the US… this could be the start of a re-making of the entire US beer/beverage distribution industry.  It sure feels like the pressure has been building for profound change for some time.  Each of you… look in the mirror and tell me you don’t believe the same thing. Is this the event that sets it in motion?

For the US, even if the structure is attractive, how much more value could the new owners provide? Learning and developing new skills at the corporate level as we know is a very difficult and slow process, especially considering the product portfolios and supplier biases within our industry.

If I’m a fence-sitter this might be a great time to take the offer premium… that extra ching-a-ling-a-ling – and to accept those overtures from that lover that keeps calling on the phone.  Hanging on to your business could mean it will sell for less in the future… perhaps one heck of a lot less. Financial and strategic analysis is a great evaluation tool.  It could give both a potential buyer and seller their affordability index when considering paying a premium or maximizing the purchase price.

Regardless, finding out the value of what you have might be a good place to start in an attempt to formulate a strategy… and yes, Cook and I (actually mostly Cook) do some of the best valuation and M&A work in the country.

Roulette might be a fine game in a casino (although I hear it is a sap’s bet) but it has no place in your business planning.  Russian roulette is a game for far braver souls than I.  I sure wouldn’t be playing it with my business… for most of you, by far the largest asset you own.

What will come of this?  Who knows.  But once these things get in motion, they seldom go back to where they were before.  And hoping and praying the ball falls in the right slot is no way to plan for your business’s future.  That starts with a phone call to me to discuss how we can meet your needs and discuss scheduling a strategic planning session.  Just saying… ;-)

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Comments

There are no less than 47 that have a franchise law type which govern relationship between brewer and distributor so as to restrict termination to brewer possessing "cause" (fault on part of distributor). Also, many impose requirement that successor supplier/brand owner be bound by pre-existing agreement with distributor. Some allow for consolidation on condition of payment of FMV. Otherwise deals must be struck between distributors for purchase of distribution rights.

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