Editors' pick: Originally published Jan. 12.
Investors can be guilty of thinking of the beverage industries in the ways the products are grouped in the convenience store or supermarket aisle: There's a case where the soft drinks are displayed and another, separate, display for beer. The two product categories are kept apart like battling siblings on a long car trip.
When, point of fact, there's a lot of cross-pollination of the soft drink and suds businesses. And if analysts are right, there's about to be more.
"This is indeed our core thesis that drives our global view of every beverage company," Carlos LaBoy, beverage industry analyst at HSBC, said in an email response to a question from TheStreet that asked the likelihood of a Coca-Cola merger with Anheuser-Busch. He added that a transaction, which he figured could take place before 2020, will leave a mark on just about every player in the beverage business.
Certain characteristics bear out the presumptions. For one thing, Anheuser-Busch InBev is largely an asset of 3G Capital, the Brazilian private equity fund that has invested in a boatload of iconic American consumer brands, including Burger King and the assets that it combined to create Kraft Heinz (KHC) - Get Report , with an assist from Warren Buffett's Berkshire Hathaway (BRK.A) - Get Report , (BRK.B) - Get Report .
Berkshire Hathaway, not incidentally, already holds a 9% stake in Coca-Cola, and Warren Buffett is known to be a big fan of the company's products, especially the cherry flavored concoction.
In a little bit of palace intrigue, Buffett's son, Howard, currently a member of the Coke board, said last month that he won't stand for reelection at the April shareholder vote, leaving analysts to scratch their heads over the implications of the departure.
Ali Dibadj, the beverage analyst at Bernstein, suggested several ramifications from Howard Buffett's departure, one of which would be nudging Coke management toward a linkup with Anheuser-Busch. However, the analyst also suggested that it could mean that Berkshire Hathaway is copacetic with the glidepath that Coca-Cola is on, and feels the company doesn't need a transformative event like a takeover by Bud. Or ... that it sees an even more outside the box idea, like an Anheuser-Busch consolidation with Coke rival PepsiCo (PEP) - Get Report , a holding in Jim Cramer's Action Alerts PLUS portfolio. Obviously there are a lot of moving parts to this initiative.
Of course, the departure of Howard Buffett is far from the most significant change in Coke's management. Early last month, Coca-Cola said James Quincey, currently president and chief operating officer, will assume the role of chief executive from Muhtar Kent in May.
It's a move that's got a lot of implications for what Coca-Cola will look like going forward. Quincey is seen as supportive of the pricing increases that have helped the soft drink company offset waning demand for sugary soft drinks, and is a proponent of the cost-cutting initiatives that current management has been installing.
But perhaps more importantly, the ascension of Quincey takes out one roadblock to a consolidation with Anheuser-Busch: as Bernstein's Dibadj noted in a recent report, "Kent was initially resistant to much of the positive change at KO - including an ABI-KO deal."
These changes in management -- as well as some other structural developments at Coca-Cola -- don't immediately translate into a Bud-Coke consolidation. As Bernstein's Dibadj said recently, Coca-Cola "is scared of an acquisition by Anheuser-Busch." So scared that when Anheuser-Busch completed its mega-brew acquisition of SABMiller, Coca-Cola used the change in control to trigger a clause in a contract it had with SABMiller to repatriate its deal under which Miller helped bottle most Coke products in Africa.
The thinking was that Anheuser-Busch has similar bottling responsibilities for Pepsi in Europe. Coke didn't want an ally of dreaded rival Pepsi using its African bottling rights as a way to get a peek under the hood of Coca-Cola operations and financials.
See why we said at the jump that there are more intersections in the brewing and soft drink businesses than the untrained eye might have expected?
Ultimately, an Anheuser-Busch deal with Coca-Cola makes sense. Both the soft drink and suds businesses have been gasping for growth. Bud's best avenue has been diving into the craft beer market, a tough maneuver inasmuch as it requires Anheuser-Busch to effectively disguise that its DNA is all over the product. (Beer geeks reflexively dismiss anything that smacks of mass merchandising.)
Meanwhile, Coke has a strong brand and what amounts to an annuity stream. As its own management has identified, there are huge opportunities to cut costs - perhaps even well beyond the $3 million currently targeted. Both Anheuser-Busch's and Coke's supply chains - things like bottles and cans, not to mention bottle caps - can be rationalized, along with what would become a magnificent integrated distribution system. (One truck per supermarket loading the beer and soft drink aisle instead of two? That sounds like we've just cut costs 50%.)
Then there's the takeover mechanism. 3G is said to love Coke. Warren Buffett, who worked with 3G to put the assets of Heinz and Kraft together, already established his affection for what once billed itself as "the real thing." Given all the moving parts in the Anheuser-Busch operation, it is, after all, still contending with integration of the freshly minted Mega-Brew transactions, it may not happen immediately.
But don't be surprised if you're someday buying a refreshing bottle of Coca-Cola and it's brought to you by Anheuser-Busch.