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Beer Industry Witnesses Another Round of Consolidation

A lot has been happening in the global brewing industry which is hinting at another round of consolidation. After the rumor of a possible acquisition of SABMiller plc (SBMRY) by Anheuser-Busch InBev SA/NV (BUD) aka AB InBev, The Wall Street Journal last week reported that a Russian company is acquiring American sub-premium craft beer maker, Pabst Brewing Company.

As per the news sources, Russia’s biggest independent brewer, Oasis Beverages has partnered with a California-based private-equity firm, TSG Consumer Partners LLC, to acquire Pabst Brewing Company. As per the agreement, Oasis Beverages will be entitled for a majority stake while TSG will take a minority stake in the craft beer company. The Wall Street Journal anticipates the deal to range between $700 million and $750 million.

Founded by Jacob Best in 1844, the Pabst Brewing Company was named after Frederick Pabst in 1889. The company is currently owned by a consumer-products investor C. Dean Metropoulos & Co., who had acquired it in 2010 for $250 million from a charitable foundation. Currently, the company with its over two dozen brands accounts for nearly 3% of the U.S. beer market.

Oasis Beverages’ recent move exhibits its intent to enhance operations in the U.S. alcoholic-beverage market. The company currently operates in Russia, Belarus, Kazakhstan and Ukraine.

We have noticed that the alcoholic beverage industry has been witnessing major consolidation in recent times. All the companies are taking utmost efforts to increase their share in this matured U.S. beer market and in other global markets either through merger & acquisition or by expanding into new regions.

Earlier, Bloomberg, on Sep 14 reported that SABMiller approached Heineken NV (HEINY) with a buyout offer which was rejected by the later. It is believed that the acquisition offer made by SABMiller was to defend itself from AB InBev’s takeover bid.

Some other important acquisitions made in 2014 include the buyout of Beam Inc. in January by Japanese beverage company, Suntory Holdings Ltd., for a sum of $16 billion. Subsequently, AB InBev, in order to strengthen its position in the Asia-Pacific region, reacquired its South Korean asset – Oriental Brewery – for a sum of $5.8 billion from KKR and Affinity Equity Partners. Further, Constellation Brands Inc. (STZ) is anticipated to close its pending acquisition of Casa Noble, a premium quality tequila brand, by the end of this month.

We expect the consolidation trend that has spread across the beer industry to continue as this will not only facilitate the companies in increasing their market share but will also help in reducing costs through leverage from suppliers and distributors.

Further, presence of large amounts of cash on corporate balance sheets, favorable credit markets, low interest rates, and strength in the stock market have also acted as confidence boosters for the companies.

Looking at the share movement of both the buyer and seller companies after any merger & acquisition news, we believe that shareholders extend full support to big acquisitions so that the companies can beef up their market presence amid rampant consolidation.

Therefore, looking at the recent developments, we suggest our investors to add and hold some alcoholic-beverage companies to their portfolio. Apart from AB InBev, Boston Beer Company (SAM) and Molson Coors Brewing Company (TAP) are the premium beer makers which show huge growth potential as both the companies are making efforts to expand.

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