05 Sep 2005
By Andrew Sawers
The last time Malcolm Wyman bought the beers, the round cost him $7.8bn. The time before that, €162m. And in 2002, “Miller Time” set him back $5.6bn.
As chief financial officer of the FTSE-100 group formerly known as South African Breweries, Wyman has bought a lot of beer over the years. Since joining the SAB finance department from the world of investment banking in 1986 – becoming corporate finance director in 1990 and CFO in 2001 – Wyman has seen a huge amount of change in the company. Just five years ago the group was barely nudging $4bn turnover. Today SABMiller tops $14bn. But back when Wyman joined the company it had just a handful of operations in Lesotho, Botswana, Swaziland – and a near 100% market share in South Africa.
“We were up until the early ’90s just a South African brewer,” Wyman explains. “We had a few investments in local countries but they were essentially just satellites of South Africa. When things started changing in the post-communist world, opportunities started to arise and at the same time there were changes taking place in South Africa. We had always wanted to operate outside South Africa but given the role and the policies of the government, it was impossible to do so as a consumer company. So we were ready to test ourselves when things changed.”
Importantly, SAB (as it then was) decided to confine its ambitions to the developing markets – central Europe, Africa, even China. “We saw quite a lot of saturation in the developed markets but, surprisingly, the bigger international brewers were not moving very quickly into the opportunities that were starting to open up. We felt the businesses we could acquire would be relatively cheap and with the skills that we could bring to those businesses, we could upgrade them and start improving them.”
The company now owns such well-known brands as Pilsner Urquell, Peroni and, of course, Miller – which is a bit of an anomaly as the US beer market isn’t exactly under-developed (although beer consumption is still growing slightly in the US, unlike some other western markets). But the real strength of the business lies in the local brews it owns in countries from Peru to Poland, from China to Ghana.
Take SABMiller’s latest acquisition, for example – the $7.8bn purchase of the Colombia group confusingly named Bavaria. The business operates predominantly in Peru, Ecuador, Colombia and Panama. In several of those countries it has a virtual monopoly. Areas such as this are attractive because they have high economic growth rates, a young population, low (but rising) per-capita beer consumption and a “geo-political environment that we think is moving in the right direction”, Wyman says. The group can bring a lot of value to such businesses, working on branding, distribution, general execution.
But there are still risk factors. Political stability, corruption and even personal safety can all be serious issues, to say nothing of the simple business fact that monopolies are vulnerable if they have no in-built defence mechanism. “We’re used to working in developing markets,” Wyman says, arguing that such economies are tending to move towards being “less unsafe”.
He insists it’s not a gamble. “We’ve looked very, very carefully at what we think could happen in those areas. ‘Gamble’ seems to indicate that it’s red or black. We’ve actually costed in what we would need to do in the event of strong competition; we’ve worked out what would happen to pricing and to market share – we’ve priced all that in. And we tend to take a conservative viewpoint when we arrive at our [acquisition] prices, so we don’t need to gamble.”
Over the years SABMiller – and in particular the finance department – has developed a rigorous approach to acquisition appraisal that involves an evaluation of risks, a tough approach to the deal price, and a systematic methodology for introducing corporate sales and distribution practices and brand management processes. The risk-appraisal process doesn’t try to guess what’s going to happen, but looks at a number of scenarios, considers the implications and risks and then “we’ll price the deal accordingly from there”.
On the other side of the planet, SABMiller has been investing in China since 1994, making it one of the first major western businesses to have made big inroads into what is now the world’s fastest-growing economy. The company has been working on a 49%:51% joint venture with Hong Kong-based China Resource Enterprises, which itself is majorityowned by the Beijing government.
The joint venture is now the second-largest brewing business in mainland China, but it was slow to get started. “We took the view that we needed to go in as a joint-venture partner, as opposed to trying to run something on the other side of the world on our own,” Wyman says. “So we spent two years, I suppose, in a courtship dance with China Resource Enterprises, which was doing exactly the same thing with us. We spent a long time feeling each other out to see whether we would be the right partners.”
SABMiller was quick to expand out of South Africa when it was able, quick to get into China, and also, as it turns out, quick to adopt a financial methodology that would help it create value for shareholders, evaluate investment opportunities and reward senior managers. The group took on board the principles of Economic Value Added, or EVA. The methodology puts the weighted-average cost of capital (WACC) at the heart of the company’s investment criteria. The WACC for the group is 8.75%, but Wyman uses a “project-based” cost of capital rather than one number across the board. What that means is that for investment opportunities in some parts of Africa, for example – “which is a little bit more volatile and risky” – the hurdle rate could be in the “upper teens”, whereas in the US it would be 7% or below.
“From year to year you do have variations in EVA depending on what capital
you put down and acquisitions that you may make,” Wyman explains, “but over the
longer term, looking at the Delta EVA is a way of making sure that you
are consistently adding value and that you’re not losing sight of the fact that
you’re not getting back what your cost of capital is.” He adds that, because of
investment that usually has to be made to upgrade a new acquisition, he would normally look for a new business to go EVApositive after about three to five years. For Bavaria, the expectation is more likely to be five or six years.
Having evaluated and completed an acquisition, Wyman’s team face the major
problem of putting the right financial controls in place. This sounds daunting
given that the company operates in some regions where “business ethics” is an
oxymoron or, in less extreme cases, financial management skills are
“There’s a lot you need to set by way of standards because you’re operating in developing as opposed to developed markets,” Wyman says. “We have a board subcommittee which is totally involved in all of our corporate accountability around the world. We set standards, ethics and guidelines that each company within our group has to sign up to – and there’s a formal sign-off with that. It’s absolutely essential if you’re operating in the developing markets.”
On the controls side, Wyman says: “We’ve always had a very strong financial
reporting and control environment, and we’ve always believed very strongly in
the quality of reporting. If you go back to the days when we were just a South
African brewer, we used to win awards for the quality of our financial
reporting. As we started growing around the world we’ve taken our systems and
people from our South African operations who are steeped in financial reporting
and control systems
and placed them in every one of the operations that we’ve acquired.”
Normally, this involves putting in their own MD, FD and some marketing, sales
distribution people “to bring the same rigours that we use in putting together our brand portfolio”. Wyman makes the point that this process includes training the local managers. “But most importantly, we’ve taken our systems with us and embedded those into the organisation. We don’t go in and take what we find and then just tinker with it.”
Wyman has his most senior financial directors running “hubs” in America, Asia, Africa, Europe and now South America. Underneath them are FDs who run each of the countries. But while SAB uses SAP, “We don’t just change everything immediately,” Wyman insists. “We try to link in systems. Then over time we analyse and try and work out when the system is going to be replaced and tie that in with an overall programme so that we try and do it region by region.”
Although SABMiller’s shares, currently listed in South Africa and London, trade on Wall Street in the form of American Depository Receipts (ADRs), the company is not a Securities and Exchange Commission registrant, and so is not subject to the notorious Sarbanes-Oxley rules, particularly on internal controls. One might think that with such a huge acquisition and integration programme that Sarbox compliance would be just too demanding for the company. But Wyman says it is “moving voluntarily towards substantive compliance” with Sarbox.
He is more concerned with creating value from that process rather than simply ticking the box. “If we have to upgrade our systems, we try and make sure the upgrade is something which is business-oriented, which can give us perhaps better information and more of it than we’re currently getting.”
Wyman believes one of SABMiller’s strengths is its emphasis on management performance skills. Starting in the 1970s, the company focused on building management skills and resources, launching a programme to train and develop black management. This resulted in it having so many managers by the 1990s that “we were able to take a lot of senior and middle management and put them out in different parts of the world”.
Because of sanctions during the apartheid regime, the company developed what became probably the largest single training centre for the beer industry in the world. “We made a virtue out of necessity because we used to train all our own people; now we train people from all over the world.”
Wyman’s own development mirrors that of the group. He, too, had more financial management and corporate finance skills than were, strictly speaking, needed when he joined the company almost 20 years ago. “I came with possibly the skills that this company was going to need in the future, although we didn’t know it at the time,” he says.
Even then, SAB’s strategy was oriented towards mergers and acquisitions – “my
favourite subjects”. As a banker he ran capital markets and treasury units, and so had a background in many of the necessary financial disciplines. His banking involvement in acquisitions also introduced him to financial reporting quality issues, which helped develop his internal control skills.
“Over the years I have probably handled virtually everything that there is in finance,” he says, “which made it very easy for me then to just pick up the role and particularly to concentrate on strategy, global strategy in the beverage and beer industry, and handle all the major acquisitions. But, as I said, you’ve got to have good people working with you and we do have that at SAB.”
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