Prepared Foods January 24, 2005 enewsletter

SABMiller, the international brewing group, is in the running to buy Bavaria Business Group, South America's second-biggest brewer, in a deal that could be worth up to $6 billion (£3 billion).

Bavaria, based in Colombia and majority-owned by the wealthy Santo Domingo family, is also thought to be in talks with InBev, the brewing giant created by the $11.2 billion merger of Interbrew with Brazil's Ambev. Anheuser-Busch, owner of the Budweiser brand, is also thought to be a possible contender for the business, as is Heineken.

Shares in SABMiller dropped nearly 3% in London on earlier reports that the brewer may be preparing to pay up to $9 billion for Bavaria. Bavaria's shares in Colombia have almost doubled in the past 12 months, giving the group a market capitalization of about $2.9 billion.

Although $9 billion could theoretically be reached if the auction is competitive enough, a price tag that size would be viewed by many SABMiller investors as too high. Most analysts believe Bavaria is unlikely to command more than $6 billion.

Gerard Zaffran, at Merrill Lynch, said, "If there have been other interested parties, then the premium SABMiller may need to pay could rise, but not in my view to the levels suggested."

Sources close to the talks believe the auction process is at an early stage. A statement from the president of Bavaria cast confusion on the sale process. Ricardo Obregon was reported as saying the company was not considering a sale, but statements were also translated as suggesting Bavaria was interested in forming "alliances" with international partners.

Bavaria has a 99.5% share of beer sales in Colombia and would give a buyer a strong platform for expansion into the rest of South America. With a population of about 44 million people, Colombia is the second-largest country in South America. Its average beer consumption is about 34 liters per person a year, compared with more than 100 liters per person in the United Kingdom. This means there would be room for SABMiller to grow the business. Most of its Western beer markets are in decline, and SAB has been struggling to turn around the performance of its Miller arm in the United States.

SABMiller's rival Inbev has a dominant position in South America, and were SABMiller to win the Bavaria auction, it would secure a vital rival footing in the growing South American beer market.

InBev has several businesses in Latin America but wants to extend its reach beyond Brazil, which accounts for about 70% of beer sales. It had begun to mount an offensive against Bavaria, when AmBev said in 2003 it would spend $38 million on a brewery in Peru.

However, Bavaria has recently been expanding into Peru and Ecuador and posted a third-quarter loss, the second in a year, after taking on $1.5 billion of debt to finance its expansion.

It is understood that the Santo Domingo family, worth about $1 billion, is now interested in selling its 70% stake in Bavaria. It has been a shareholder since 1967, although Bavaria's origins go back to a German immigrant, Leo Kopp, who founded the Cerveceria Alemana de Kopp in Colombia in 1889, eventually changing its name to Cerveceria Bavaria. The government took over the company during the Second World War as part of a nationalization of companies owned by Germans.

Julio Mario Santo Domingo, a septuagenarian ranked as one of Colombia's wealthiest men, swapped shares between two family-owned breweries for Bavaria shares in 1967. He also runs a holding company for his non-beverage related businesses which include telecommunications, newspapers and an airline. SABMiller declined to comment on the situation.