South African Breweries to Buy Miller, People Say

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    05/29 19:01
    South African Breweries to Buy Miller, People Say (Update2)
    By Mark Lake


    London, May 29 (Bloomberg) -- South African Breweries Plc is close to an agreement to buy Miller Brewing Co. from Philip Morris Cos. for $5 billion, creating the world's second-biggest beermaker, according to people familiar with the transaction.

    An announcement of the purchase is expected to come as early as tomorrow, the people said. SAB will pay $3 billion in stock and assume $2 billion in debt from Miller, the maker of Miller Lite and Miller Genuine Draft, the people said. The board of SAB today met in London to review the transaction, the people said.

    SAB Chief Executive Graham Mackay is betting he can turn around more than two decades of falling market share at Miller, which failed to counter the catchy ads and expanded distribution network of Anheuser-Busch Cos., analysts said. Mackay has spent about $2 billion in two years to buy rivals in emerging markets such as China as sales fell in South Africa, SAB's biggest market.

    ``Miller gives SAB massive exposure to the U.S. beer market,'' said Merrill Lynch & Co. analyst Martin Feldman, who rates Philip Morris ``near-term strong buy'' and doesn't own any shares.

    Nick Chaloner, a spokesman for SAB, and Miller's Scott Bussen declined to comment. Philip Morris declined to comment.

    The shares of London-based SAB, maker of the Czech Pilsner Urquell beer, rose 5.5 pence to 576p. They have climbed 13 percent since the start of April, when the company confirmed it was in talks to buy Miller. Investors said they preferred a price of $5 billion or less, which at most is a fifth more than the sales SAB would gain.

    Philip Morris, based in New York, rose 91 cents to $56.01. The stock has gained 5.3 percent since the talks were confirmed.

    Dresdner Kleinwort Wasserstein Securities LLC and Lehman Brothers are advising Philip Morris, and J.P. Morgan is advising SAB, the people said.

    Bowlin Staying

    Miller Chief Executive John Bowlin will remain at the head of the brewer after the transaction, the people said.

    Analysts said they expect few cost savings from the acquisition because the two companies have little overlapping business and Miller already is one of the most efficient U.S. brewers. Miller's per-barrel cost of goods sold is about $55, compared with $57 for Anheuser-Busch and $67 for Coors Brewing Co., according to research by Credit Suisse First Boston.

    SAB's Mackay will have to focus on reviving sales, investors said. Miller appealed to beer drinkers with its ``Tastes Great, Less Filling'' ad campaign for Miller Lite, a low-calorie beverage it pioneered in the 1970s. Since then, the brewer's share of the $60 billion U.S. retail beer market has slid to less than 20 percent, while Anheuser-Busch, the maker of Budweiser, grabbed almost half the market.

    SAB's ``management is going to have to justify why they think it's worth paying for slow-growth assets,'' said Rob Forsyth, who oversees $5 billion in equities, including SAB, at Investec Asset Management.

    Miller gives SAB income in dollars, investors said, and that will help SAB counter declines in South Africa, where a more than 50 percent slide in the rand has contributed to two straight years of falling profit. Buying Miller would cut SAB's profit in rand to about a third from half, analysts have said.

    Image

    For Philip Morris, the sale is a ``positive strategic move,'' said analyst Keith Patriquin of Loomis Sayles & Co., whose $65 billion in assets includes 116,469 Philip Morris shares. ``They can put Miller in the hands of a global brewer.''

    Miller's share of the U.S. beer market has fallen in six of the past seven years even as marketing spending increased. Its sales fell to 40.6 million barrels in 2001, or 19.7 percent of the U.S. market, from 44.2 million, or 21.6 percent, in 1999.

    The company, the second-biggest U.S. brewer after Anheuser- Busch, accounted for 4.7 percent of Philip Morris's $89.9 billion in sales last year. In the first quarter, Miller's U.S. shipments to retailers rose 1.6 percent to 9.5 million barrels. Operating income for the unit rose 4.8 percent to $130 million.

    Miller needs to fix its image and attract more younger consumers, Patriquin said.

    ``Many of their past ad campaigns were unsuccessful and didn't connect with the target audience,'' he said. ``Miller Lite was the light brand in the '70s and early '80s.''
 
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