Quick Pick: SABMiller

On Tuesday, SABMiller (SBMRY - commentary - Cramer's Take) and Molson Coors (TAP - commentary - Cramer's Take) announced plans to contribute their U.S. units to a newly formed joint venture to be called MillerCoors, providing significant economies of scale and an estimated $500 million in annual cost savings. From an investor's standpoint, this is just one more reason to like SABMiller.

The consumer packaged-goods industry is all about scale; the greater the market share, the higher the margins. In that regard, beer is no different. As a result of its control of just under 50% of the U.S. beer market, Anheuser-Busch (BUD - commentary - Cramer's Take) sports much better margins than its competitors. This deal, which will create a larger, more formidable No. 2 with an estimated 30% market share, will help to lessen the margin disadvantage as overhead and other expenses are spread over greater beer volumes.

A full one-third of the synergies created through the formation of MillerCoors will result from a reduction in freight costs. As it stands today, Coors produces most of its beer in Golden, Colorado and, at a substantial cost, ships it from there to most parts of the country. Tapping into Miller's network of eight U.S. breweries, the new company can optimize production and lower its freight costs. It can also be more effective with wholesalers.

As consumers are increasingly drinking spirits and wine, the U.S. beer market is struggling, with the only real growth coming in imports and craft beer. This deal doesn't do anything to change that. But it does help both SABMiller and Molson Coors make their U.S. operations more effective and competitive. Importantly, MillerCoors will also have access to SABMiller's international brands, which should benefit from the fact that imports in general are seeing some real growth.

For Anheuser, a stronger, more able competitor is an incremental negative for a company already operating against substantial fundamental headwinds. Anheuser has already been losing market share this year; this deal certainly makes further share losses a risk.

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At time of publication, Norton's fund was long SABMiller and short Anheuser-Busch, though positions may change at any time.

Charles L. Norton, CFA is a principal of GNI Capital, an equity long/short money management firm that provides investment management services to institutional clients including mutual fund sponsors, trust companies, investment advisory firms, corporate retirement plans and family offices. Mr. Norton is responsible for portfolio management and investment research for all of the company's managed assets, including the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). Previously, Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate long/short equity accounts. Prior to his experience on the buy side, he was an investment banking analyst at Smith Barney. He has a bachelor of science in management degree in finance from Tulane University's A.B. Freeman School of Business, and is a CFA charterholder. He is a member of the CFA Institute and the CFA Society of Dallas-Fort Worth. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.