UB on buy-high

Boby Kurian

UNITED Breweries's (UB) slew of brewery acquisitions is significant, and the beer major may have shut the door on threats to its supremacy in the beer business.

Three deals announced in the last 45 days -- the proposed acquisitions of Mangalore Breweries, Mumbai-based Associated Breweries and Gurgaon-based Inertia Industries Ltd -- give UB fresh capacities in markets that are emerging and important. UB's brand portfolio will also expand with San Miguel, Sandpiper and London Pilsner being the notable additions. The icing for UB is that the deals may not entail major cash outflow considering the financial liabilities of the acquired breweries.

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UB controls roughly 40 per cent of the domestic beer market, pegged at 65 million cases annually. It had a brewing capacity of 45 million cases before to the latest acquisitions and had access to 24 of the country's 56 breweries. The beer market, barring exceptions such as Andhra Pradesh and Uttar Pradesh, has not exactly been upbeat this fiscal. So, why did UB embark on more brewery acquisitions when it was already running with excess capacity?

Answer may lie in Vittal Mallya's decision to pick up breweries on sale after Morarji Desai declared prohibition. The acquisitions enhanced UB's stature and catapulted it into leadership position in the beer industry when prohibition was lifted.

UB sees a similar opportunity now. The beer market is reeling under excessive taxation and stagnant sales. Small independent breweries are finding the going tough and increasingly becoming soft targets for acquisitions. Acquiring control over these breweries, even with all their financial liabilities, makes business sense for the future.

If, as is expected, the beer industry is delinked from the Indian Made Foreign Liquor (IMFL) business, it will become a beverage and subject to low levels of taxation. Prices may drop drastically and result in a surge of beer sales. The current acquisitions should help UB consolidate when the beer market actually explodes.

Perhaps, UB went on the acquisition spree to prevent these small breweries from falling into the hands of multinational beer companies. UB beat South African Breweries (SAB) and Foster's India Ltd to bag Associated Breweries and Mangalore Breweries. SAB was looking at Associated for a toehold in the crucial western market, while Mangalore would have suited Foster's foray into the South.

But UB's strategy of acquisitions, if primarily meant to choke the cash-rich multinationals, may not be financially feasible and cannot always guarantee the desired results.

The brand portfolio expansion in the wake of acquisitions will help UB offer differentiated products. The beer major now has a chance to push sales through effective price segmentation and it is expected to augment UB's resolve to garner 50 per cent of the domestic beer market in the short run.

UB claims that its acquisition strategy is not based on uninformed optimism. It feels that a momentum is building in the beer business and expects State governments to delink beer from the alcohol business.