by Dan Vallada FoodBizDaily.com Bureau Sao Paulo
An agreement between AB-InBev and PepsiCo may be the first step toward a merger that would threaten the hegemony of the world's leading soft drinks brand.
October 26 2009 - Finding Common Ground: Besides being Coca-Cola competitors, AB-InBev Carlos Brito, and PepsiCo Indra Nooyi apply similar trade policies. An agreement between PepsiCo and Anheuser-Busch, the U.S. subdsidiary of AB-InBev, lit a warning light at Coca-Cola.
The contract, signed on Oct 14, states that the two companies developed a joint project to cut costs by combining their input acquisition methods not directly related to beverage production and thus gaining bargain power with suppliers.
Presidents Carlos Brito (AB-InBev), and Indra Nooyi (PepsiCo), did not announce how much they intend to save, but to industry analysts, the agreement strengthens the expectation of a possible merger between PepsiCo and AB-InBev.
Coca-Cola (which according to 2008 data from Beverage Marketing Corporation owns 43% of U.S. soft drinks market against 31.8% of PepsiCo) has reasons to worry. AB-InBev -brand that belongs to Brazilian entrepreneurs Marcel Telles, Beto Sicupira and Jorge Paulo Lemann, the three biggest shareholders of the group- became the world’s largest brewery because of its aggressive mergers and acquisitions policy.
Telles planned the union between rivals Brahma and Antarctica (where AmBev came from), led the merger between Belgium's Interbrew and AmBev, and in November 2008, bought Anheuser-Busch, maker of Budweiser, for U$52 billion.
Would PepsiCo be the next target? There are signs pointing in that direction. One of them: AB-InBev announced it would sell its operations in Central and Eastern Europe to CVC Capital Partners for U$3 billion and thus strengthen its income.
AB-InBev's interest for PepsiCo is not new. Behind the scenes, it is said that if the purchase of Anheuser-Busch did not take root, the brewery would negotiate with PepsiCo or Coca-Cola.
“It seems that there will be a closer relationship” said Julia Perez, food and beverage analyst at Lafis Consultancy. “PepsiCo has an aggressive marketing line, much closer to InBev than Anheuser-Busch itself, which has been suffering from the cost reduction policy imposed by Marcel Telles” she concludes.
In fact, in a few months, InBev has radically changed Anheuser-Busch’s way of management. Jobs were cut and benefits reviewed. Executives were forced to switch first-class travels to narrow economy-class seats.
"They need to raise cash now. Telles, Sicupira and Lemann are experts at it" says banker Luiz Cezar Fernandes, a former partner of Banco Pactual, who knows the three executives pretty well. "I bet that in five years they will buy PepsiCo. They are gradually leaving secondary markets to strongly invest in core markets," says Fernandes.