Ethanol, Beer and the Intoxicating Lure of Consolidation

News comes this week that the Belgium beer brewer, InBev is considering making a move to acquire St. Louis beer maker, Anheuser-Busch. Rapid consolidation in the beer business has been going on world-wide for a long time with many of the local brews with hundreds of years of history in central and western Europe being rolled up into giants like InBev and SABMiller of London. The same has been taking place in Mexico and South America where local beers with brand value are giving way to acquisition as either next generation family members don't want to or can't manage the businesses or the economics of scale make consolidation compelling.

Anheuser-Busch has been struggling with stock valuation issues for several years now primarily because of competition from a proliferation of micro-brews which have been popping up and from a switch in tastes and preferences to some of the new brand hard liquors and wine which are popular with the younger subset of the legal drinking population. Less filling and quicker to the buzz than your father's choice.

However, a couple of the principle reasons that this takeover is in the mix, are related to topics we have been talking about here and at least one of the motives represents part of the many unintended consequences of ethanol subsidies. Rising commodity prices have made the raw materials used in beer (grains) very expensive. As profit margins are cut to the bone, efficiency and economies of scale become key considerations in merger motives especially for larger companies with well established brands but flagging performance in the short and intermediate term. These characterisitics are key considerations when companies scan for acquisition targets. The other motive is the cheap price for US assets to companies for whom the EURO (especially) is the coin of the realm.

It is not hard to imagine that the excess profits being temporarily enjoyed by grain producers will fuel a new round of similar (if not smaller scale) acquisitions in their local communities. Successful farmers flush with new found wealth will begin to gobble up less successful neighbor's land and assets, which of course has been happening for decades but the pace will likely quicken.

Companies that use grain as a principle input from beer to bread to pork and doughnuts will all be put under increased consolidation pressure to stem the red-tide from sustained higher input costs. The talks between Northwest and Delta airlines for example are in the same vein where sustained higher fuel costs and difficulty raising fares has pushed every airline out there to begin "dating" talks with likely merger mates.

One of the interesting differences will be that the value of the dollar will make the consolidation targets especially attractive in the US for foreign buyers. Nothing necessarily wrong here but I am willing to bet that these "policy" implications were not in the political decision framework of those who have created this situation.

The anti BIG crowd in concert with government action are among the principle drivers of consolidation in US agriculture even though they howl the louder as the solutions they force upon businesses result in the very things they oppose. Other key factors include technological change, the value of quality as measured by uniformity and economies of scale. Increased regulation and subsidies almost always change the playing field unequally and when it tilts, the inevitable acquisitions begin.

Time for a cold one...