BSc Thesis Brewing industry consolidation due to M&As and its effect on acquirer shareholder value Martijn P. Ophof 10265910 Economics & Finance Supervisor: Mr. R.C. (Rob) Sperna Weiland July 2016 Statement of Originality This document is written by Student Martijn Ophof who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. Martijn P. Ophof (University of Amsterdam) 2 Contents 1. Introduction ..........................................................................................................................................4 2. Literature review:..................................................................................................................................6 2.1 Mergers and acquisitions ................................................................................................................6 2.2 Measure M&A success .....................................................................................................................9 2.3 Brewing industry overview ...........................................................................................................11 2.4 Trend in brewing industry ............................................................................................................13 2.5 Big Four: M&A part of strategy in brewing industry ....................................................................14 3. Research question and hypothesis......................................................................................................19 4. Data and methodology ........................................................................................................................21 4.1 Sample Data ...................................................................................................................................21 4.2 Methodology ..................................................................................................................................21 5. Results .................................................................................................................................................27 5.1 AB-InBev ........................................................................................................................................27 5.2 SAB Miller ......................................................................................................................................29 5.3 Heineken ........................................................................................................................................31 5.4 Carlsberg ........................................................................................................................................33 5.5 Summary results............................................................................................................................34 6. Conclusion and discussion ..................................................................................................................35 7. Appendix..............................................................................................................................................37 8. Bibliography ..........................................................................................................................................42 Martijn P. Ophof (University of Amsterdam) 3 1. Introduction Last year, world’s largest brewer, AB-InBev announced to acquire SAB Miller, world’s second largest brewer, for 107b $. Although the acquisition has to be approved by competition authorities, this could result in one global brewer producing a third of total beer volume produced worldwide (Buckley & Mulier, 2015). More than sixty years ago the situation was different, back then four largest brewers together accounted for 22% of global market share. Furthermore, the market was marked by small local brewers; nowadays the industry is marked by fewer larger brewers. This consolidation is due to globalization but also to industry-specific characteristics which led to increased merger & acquisition (M&A) activity over the past years. Decreased sales in developed countries in recent years, mostly West-Europe, resulted in quest among large brewers to find targets in profitable emerging countries. Existing evidence has extensively examined the overall wealth effects to acquirer and target shareholders following from M&A announcements. Short-term studies found significant positive returns on stock for target shareholders (Martynova & Renneboog, 2006; Bruner, 2002; Eckbo, 2008). Whereas acquirer shareholders earn an overall abnormal return of zero percent (Bruner, 2002). However, when industries are investigated individually the acquirer abnormal returns can deviate from zero and the capital market will value synergies potential or high acquisition premiums. The increased number of M&As within the brewing industry have attracted the attention of Ebneth & Theuvsen (2007) and Mehta & Schiereck (2012), who found no overall significant return and significant positive returns, respectively. Currently, the beer market is dominated by AB-InBev, SAB-Miller, Heineken and Carlsberg (the big four), each with another M&A strategy and financial exposition. This paper focuses on the short-term returns of the big four for the past fifteen years and updates existing short-term evidence by analyzing most recent M&As within the brewing industry. To examine the short-term wealth effect of M&A announcements of the big four, we will use the event-study methodology described by (MacKinlay, 1997). Assuming efficient market hypothesis, this methodology measures the response of M&A announcements on acquirers stock. The event study is applied to 52 M&A announcements of the Big Four from 2000 – 2016. Martijn P. Ophof (University of Amsterdam) 4 We will start with general theories about M&As and ways to measure M&A success. To understand the brewing industry, a brief history of the brewing industry is provided. After that, we will zoom in at the M&As of the big four over the past fifteen years. The results show different returns for the big four brewers; this might be due to different M&A strategies. Martijn P. Ophof (University of Amsterdam) 5 2. Literature review: 2.1 Mergers and acquisitions Mergers and acquisitions (M&A) are part of corporate finance and point out the market for corporate control. Both terms are used as synonyms in literature, but there is a slight difference between them. In an M&A transaction, the buyer is called the “acquirer” or “bidder”, the firm that is acquired is called the “target” firm. Either a firm, group or individual can acquire a target firm, or the firm can merge with the acquirer firm. In the case of a merger, the acquirer and target agree to live on as one new firm instead of two different entities separately owned. In the event of a full acquisition, the target firm will be “swallowed” by the acquirer and go on as one firm. In both cases, the transaction is the same because the acquirer needs to buy the shares of the target. In this study mergers and acquisitions are treated the same for clarity. An acquisition does not have to involve the purchase of the full hundred percent shares. Also minority stakes appear frequently. M&As within the same industry are called horizontal mergers, whereas M&As of firms producing different goods or services for a specific finished product are labeled as vertical mergers. Finally, conglomerate mergers come from M&As between unrelated industries (Berk & DeMarzo, 2011). The two most general methods of payment to buy the stock or existing assets of the target are cash and a stock swap (share offer of the acquirer or newly formed firm). A combination of cash and shares is used as well. The price that an acquirer will pay to take over a target firm equals the value of the target before the takeover plus a premium, called the acquisition premium. Mergers and acquisitions mostly occur during merger waves, periods where there is a significantly higher level of takeovers. The same economic activities that drive expansions most likely also drive peaks in merger activity (Berk & DeMarzo, 2011). Therefore, merger activity during a financial crisis is lower in comparison with periods of economic expansions. Due to the improving economy of the last years, the level of mergers and acquisitions is increasing significantly since the beginning of the Financial Crisis in 2008. For instance, the level of M&As in the Benelux is at the highest level at the moment since five years (Maarsen H., de Groot, G., 2015). The most important motives for M&As according to a survey of 75 US firms’ CFOs from 1990-2001 are: take advantage of synergy (37,3%), diversify risk (29,3%), achieve a particular Martijn P. Ophof (University of Amsterdam) 6 organizational form as part of an ongoing restructuring program (10,7). The other motives are: acquire a company below its replacements cost, use of excess cash, reduce tax on combined firm. (Muhkerjee, Kiymaz, & Baker, 2004). On the announcement day of a possible M&A, the information about the initial takeover becomes public to investors. The M&A announcement reveals information about the expectations of future