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A Look at Breweries – Growth Through Acquisitions: SABMiller plc (SAB) and More

BUD has a market cap of $148.33 billion and enterprise value of $185.25 billion. With a healthy operating margin of 31.82%, the company has an EPS of $4.55 per share and a dividend yield of 1.68%. Its revenue for the year ended December 2011 was $39 billion, an increase of almost $3 billion from the prior year.

In June last year, there were reports that AB inBev was contemplating buying the 50% share in Modelo that it did not own. The deal, if it had gone through, meant coming together of the biggest brewer in the U.S. and the biggest brewer in Mexico.

AB InBev was forced to change the terms of its $20.1 billion takeover of Mexico’s Groupo Modelo after the US antitrust agency blocked the deal claiming that it was tantamount to stifling competition by removing an independent competitor, which would lead to higher prices. AB InBev has now modified the $20.1 billion deal and agreed to sell Piedras Negras brewery in Mexico, owned by Modelo, to Constellation and grant it perpetual rights for Modelo brands in the United States, at a cost of $2.9 billion.

Constellation Brands, Inc. (NYSE:STZ), a wine company and a marketer of imported beer in the US is linked with BUD in a complex manner. Constellation has an investment in Crown Imports LLC, which in turn is a joint venture with Grupo Modelo, S.A.B. de C.V. (Modelo) through which Modelo brands are imported and sold in the US. Anheuser-Busch owns 50% of Modelo.

Diageo plc (ADR) (NYSE:DEO)

Valuation wise, Diageo is a much smaller company as compared to the beer giant AB InBev. However, despite having a comparable operating margin (30.54%), it has higher EPS of $6.24 and also a higher dividend yield of 2.39%. Diageo posted a steady growth of 5% in sales in the six months ended December 2012 and an earnings growth of 9%.

Diageo is engaged in production, distilling and brewing of spirits, beer, wine and ready to drink beverages. The company’s core business however is in spirits rather than beer. The company has presence across the globe selling brands that include Johnnie Walker whiskey and Guinness beer and other regular and premium scotch whiskeys, vodka, rum, gin, liqueur and tequila. Established in 1886, the company is based in London.

Diageo has been involved in quite a few acquisitions in recent years. In 2011, it completed the transaction of acquiring a 50% controlling stake in Rum Creations Products and an additional 4% stake in Sichuan Chengdu Quanxing Group Company. Later, in the same year, it acquired 20% interest in SABMiller Africa BV and 49% in Carlos Palanca Group’s 49% non-controlling equity stake in Diageo Philippines. The company’s 2012 acquisitions include 100% equity of Ypioca Bebidas S.A., Meta Abo Brewery Share Company SC and Cabin Fever Maple Flavored Whisky.

The company is currently involved in the process of acquiring majority stake in United Spirits Ltd (USL), an Indian company. The fair-trade regulator is expected to give its final clearance to the nearly $2 billion deal following the conditional approval.  Earlier, the Securities and Exchange Board of India (SEBI) had cleared an open offer by Diageo for purchasing 26% stake in USL.

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