Will Warren Buffett and 3G Capital Quench Their Beverage Company Thirst?

beverage-companyIt looks as if the merger-and-acquisition mania may spread to the beverage sector sooner rather than later.
A short blog post on a Brazilian news website sent shares in the global spirits powerhouse Diageo PLC (NYSE: DEO) soaring last week. Diageo is best known as the maker of Johnnie Walker scotch, Smirnoff vodka and Guinness beer.
The blog named Brazilian buyout specialist 3G Capital as the possible suitor. Co-founded by billionaire investor Jorge Paulo Lemann, 3G has teamed with Warren Buffett and Berkshire Hathaway (NYSE: BRK-B) in recent years to pull off a number of high-profile deals. These transactions include acquisitions of H.J. Heinz, Tim Horton’s and Kraft Foods Group (NASDAQ: KRFT).
Should 3G make a play for Diageo, there’s a good chance Buffett could come along for the ride.
Diageo could certainly use the deal, estimated at $90 billion. The London-based beverage company has been plagued by a number of problems in recent years – particularly in emerging markets. But even sales in the U.S., which accounts for 40% of its operating profits, have been lackluster.
Simon Hales, an analyst at Barclays, told the Financial Times, “Diageo has had a tough 18 months, (leaving) management credibility and investor patience at a low ebb.”
That kind of sentiment toward a company is just what attracts 3G Capital to a target.
If a deal were to occur, it is likely 3G Capital would go through Anheuser-Busch InBev (NYSE: BUD). Lemann and his two partners own a 22.7% stake in AB InBev. Most analysts doubt though that AB InBev, with its deep roots in the beer brewing business, would be interested in the hard liquor part of Diageo’s business.

AB InBev and Miller Together?

A better fit for AB InBev might be the maker of Miller beer, SABMiller (OTC: SBMRY). Over 70% of SABMiller’s revenues come from emerging markets, and it has a significant foothold in the rapidly expanding African beer market.
That’s a perfect complement to AB InBev’s outsized exposure in the Americas.
But two obstacles may stand in the way. First, SABMiller is rumored to be eyeing Heineken (OTC: HINKY) as a takeover target. More importantly, it has two large shareholders that own more than 40% of the company. These stockholders could likely block any unwanted takeover.

Diageo Is 3G’s Type of Company

That brings us back to Diageo. It is the type of business 3G Capital likes. It’s in the food and beverage sector, there are no large controlling shareholders, and it’s an underperformer.
Since its current CEO, Ivan Menezes, took over in July 2013, Diageo has underperformed the FTSE Europe consumer goods index by a whopping 27%.

Source: Financial Times

The stock performance should not come as a surprise. In May, ratings agency Fitch lowered its outlook on the company from stable to negative. Fitch cited “the sharp reduction in organic growth to zero.”
Another positive factor for a possible takeover is the Guinness beer division, which accounts for 20% of Diageo’s sales. It offers huge exposure – a third of its sales – to Africa, the world’s fastest-growing beer market.

Other Deals Possible

What if the doubters are right and 3G does not pursue Diageo? It will no doubt just turn its attention back to other targets. Other rumored targets include soft drink giants PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO).
Pepsi’s stock has stagnated in recent years under CEO Indra Nooyi, so its stockholders may be ready for any sort of change. According to various rumors, 3G is said to be interested in either the snacks business or the beverage business. Either way, a 3G approach may mean a permanent split of the company’s two segments.
Another stock that has done little in recent years is Coca-Cola. Nomura Securities has several times raised the possibility of a leveraged buyout of the company by 3G and Berkshire Hathaway, which owns a 9% stake in Coca-Cola. It points to the Heinz deal as a model.
3G won’t have a shortage of possible partners in any of these deals. Besides Buffett, it is believed that in past deals 3G has obtained funds from billionaire hedge fund manager Bill Ackman and a number of well-to-do South American and European investors. That list includes tennis ace Roger Federer.
Something is likely in the works soon. 3G Capital seems voracious, and Warren Buffett has seemed willing to hitch his wagons to the 3G M&A parade at every chance.
And then there’s the fact that AB InBev has merged with another firm every four years for the past 16 years. That’s why Goldman Sachs calls the company the “supreme acquirer.”
It’s now been three years since AB InBev’s last deal. The clock is ticking.

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