Bavaria S.A.

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Bavaria S.A.

Calle 94 No. 7A-47
Santa Fe de Bogotá, D.C.
Colombia
Telephone: (57 1) 638-9000
Fax: (57 1) 638-9344
Web site: http://www.bavaria.com.co

Wholly Owned Subsidiary of SABMiller plc
Incorporated: 1959
Employees: 2,333
Sales: COL 3.04 trillion ($1.29 billion) (2006)
NAIC: 312112 Bottled Water Manufacturing; 312120 Breweries

Bavaria S.A., principally engaged in the manufacture, sale, and export of beer, is the largest beverage company in Colombia. The company also manufactures and sells bottled water. Based in the capital city of Bogotá, the company is owned by London-based SABMiller plc, the world's second largest producer of beer.

A CENTURY IN THE BEER BUSINESS

The Bavaria brewery was founded in Bogotá, Colombia's capital, in 1889 by Leo and Emil Kopp, under the name Sociedad Kopp's Deutsche Brauerei Bavaria. By the 20th century there were other small breweries in other Colombian cities, but they were weakened by the Great Depression that struck the nation at the end of the 1920s. Bavaria absorbed breweries in other cities in 1930, when it formed the Consorcio de Cervecerías Bavaria, incorporating the consolidated business as Cervecería Unión S.A. the following year. In 1950 it produced 2.79 million hectoliters of beer, more than 20 times the 1925 total. Bavaria absorbed rival Germania in 1960.

Bavaria was not without competitors, however. In Barranquilla, Mario Santo Domingo, a banker, had, in 1929, invested in two small bankrupt breweries, Cervecería Bolívar and Cervecería Barranquilla, which were merged in 1933. He later bought out his partners and soon dominated the beer business in the area, with Cervecería Águila, founded in 1913, as another important holding. During the 1950s Santo Domingo and his son Julio Mario Santo Domingo Santamaría expanded the family chain of breweries, and, when Bavaria ran into financial problems in the early 1960s, they bought 12 percent of the business. Soon they acquired a majority share. Their Cervecería Águila, S.A., formed in 1967 by the union of Águila with Barranquilla and Bolívar, was merged into Bavaria S.A. in the same year. Bavaria acquired Cervecería Unión de Medellín in 1972. During the 1970s Bavaria also purchased Andina, a brewery in Bogotá, and Malterías Unidas in Zipaquirá.

The process of expansion and consolidation continued until Bavaria attained practically a monopoly on the beer business not only in Colombia but also neighboring Ecuador, where the Santo Domingo group invested $40 million to acquire majority shares of the two chief breweries, Compañia de Cervezas Nacionales C.A., in Guayaquil and Cervecería Andina C.A., in Quito. Pilsener was the main brand in Ecuador; others were Dorada, Pony Malta, and Club. Bavaria S.A. became a public company in 1981, when it first sold shares on the Bolsa de Valores de Colombia, in Bogotá.

EXPANDING STILL FURTHER AFTER 1990

Profits from beer enabled the Santo Domingo family group to build a business empire with holdings in banking, airlines, radio, food processing, petrochemicals, metals, and other fields. By 1991, when Bavaria bought Central de Cervejas S.A., a Portuguese brewery with a large presence in the national market, the Santo Domingo group controlled more than 80 companies with combined annual revenues of almost $2.2 billion. Bavaria was, by capacity, the fifth largest brewer in the world. Julio Santo Domingo, who had succeeded as head of the family group when his father died in 1973, held under his control about 60 percent of Bavaria and was the richest man in Colombia, with a fortune estimated at $1.8 billion in 1993.

Bavaria extended its foothold on Europe's Iberian Peninsula in 1992, when it purchased a small brewery in Córdoba, Spain, where it continued to make El Águila as well as introducing another beer, La Sureña. In 1995 Bavaria took the lead in acquiring majority control of La Casera, the third largest nonalcoholic beverage company in Spain. The addition of La Casera, with its 180,000 points of sale throughout Spain, promised to improve the prospects of unprofitable La Sureña, but in 2000 Bavaria disposed of these companies. It also sold Central de Cervejas at a profit after having rehabilitated the brewery and streamlined its operations.

By 1993 the Bavaria empire in Colombia had grown to 17 breweries, three malting plants (including the first sea-level tropical one anywhere for converting raw barley into malt), a bottling plant, and a factory for producing bottles, cans, and labels. However, the market Bavaria controlled was completely saturated, and so, in that year, it introduced a new drink, Cola y Pola—beer mixed with soda. This action enraged Carlos Ardila Lülle, whose Gaseosas Posadas Tobón S.A. (Postobón) dominated soft drink production and sales in Colombia and who thought he had a gentleman's agreement with Santo Domingo to stay out of each other's beverage specialty. Ardila introduced his group's own beer, Leona, in 1994. Bavaria reacted sharply, investing $200 million in bottled water, soft drink, and fruit juice businesses, but making little headway against Ardila's virtual monopoly. By contrast, Leona, after a slow start, carved out a one-fifth share of the beer market by 2001, when a majority share was sold to Bavaria.

Grupo Empresarial Bavaria was established in 1996 to consolidate the finances of Bavaria S.A. and its subsidiaries. In 1997 Santo Domingo separated his empire of 129 business enterprises into two parts. Bavaria S.A., which continued as a beverage company, and Valores Bavaria S.A., for other activities. The Santo Domingo group was selling some of its properties in the wake of the worse economic climate in Colombia since the Great Depression. For Bavaria, this meant declining sales because of falling consumption by hard-pressed Colombians. The company closed a number of smaller regional breweries. Even so, however, Bavaria was in far better health than its sibling, and it no longer had to shift profits to the nonrelated enterprises of the group. After raising $850 million through loans and the sale of bonds, it purchased not only Leona but, on the last day of 2001, a 91.5 percent interest in Panama's Cervecería Nacional S.A. for between $260 million and $285 million. This company held 80 percent of Panama's beer sales.

In 2002 Bavaria took a 24.5 percent interest in Unión de Cervercerías Peruanas Backus y Johnston S.A.A., which controlled practically the entire Peruvian beer market, paying about $450 million for the acquisition. Soon after, Bavaria purchased the Cisneros group of Venezuela's 22 percent stake in Backus y Johnston for $567.8 million. With these purchases, Bavaria won a majority of the seats on the Peruvian brewery's board of directors and seemingly was forming an Andean empire to compete for primacy in South America with Companhia de Bebidas das Americas (AmBev), which had grown out of the merger of two Brazilian companies and had also acquired Quilmes Industrial (QUINSA) S.A., the leading Argentine brewer. Only Venezuela, Chile, Guyana, and Surinam remained outside of the two blocs. In Colombia, Bavaria closed some more plants, modernized others, and repositioned its brands in the marketplace.

COMPANY PERSPECTIVES

The company's mission is to grow in the market to an annual per-capital consumption of 60 liters, securing the leadership of our portfolio of national or international brands in each one of the categories of drinks and in all segments of the market.

Although Bavaria had become a major player in continental terms, the cost was high: $1.4 billion in investment expenditures and a debt level dangerously close to the limit accorded it by its bank creditors around the world. Financial analysts questioned whether it could compete against the onslaught of AmBev, which was merged with the Belgian company Interbrew S.A. in 2004 to form InBev, the world's biggest brewer by volume. This merger took place soon after AmBev acquired the second largest brewer in Ecuador and threatened to enter the Peruvian market, employing its chain of soft drink distribution.

ACQUISITION BY SABMILLER

Accordingly, Bavaria began soliciting bids from the world's largest brewers in 2004. The company was highly coveted as the key to achieving entry on a massive level in the sought-after Latin American market. By early 2005, SABMiller plc, the London-based third largest beermaker in the world, had emerged as the likeliest buyer. The transaction was announced in July and was completed in December of that year. The Santo Domingo family group sold its 71.8 percent interest in Bavaria to SABMiller for an estimated $3.5 billion in stock, which amounted to a 15 percent interest in SABMiller itself. In a rare outcome for Latin America, Bavaria's minority public investors received the same financial terms per share as the Santo Domingo family. The purchase included the assumption by SABMiller of $1.9 billion in Bavaria's debt. SABMiller appointed a new chief executive officer for the firm, which in 2006 was 97 percent owned by SABMiller. Bavaria reduced its beverage profile that year, when it sold Productora de Jugos S.A., the subsidiary that made the Tutti Frutti and Orense fruit juice brands, to Ardila's Postobón beverage company for $55.3 million.

Bavaria's most popular beer brand in Colombia was Águila. Other brands included Águila Light, Club Colombia, Costeña, Costeñita, Pilsen, and Póker. Agua Brisa, Agua Brisa con gas, and Brisa Spa were the brands for its bottled water, Malta Leona, Malta Leona Cool, and Pony Malta for its malt beverages, and Cola y Pola for the beer-soda mix. Pony Malta and most of the beers—but not Costeña and Pilsen—were being exported. The company had seven breweries and two malt beverage plants.

Dramatic changes—sometimes unwelcome ones—marked SABMiller's first year in charge of Bavaria, in which it reversed its net loss in 2005. Some 1,400 jobs were eliminated and changes in distribution made to supply Colombia's hundreds of thousands of points of sale for beer, mostly mom-and-pop stores. The new management was anxious to reverse the fall in beer consumption attributed to high prices, which in turn reflected Bavaria's monopoly of the national market. But Bavaria's managers were also concerned because if the price of its product was too high for poor Colombians, beer itself was looked down on as déclassé by their more affluent compatriots.

SABMiller's marketing strategy seemed to be aimed chiefly at the latter group. In place of Bavaria's one premium lager, Club Colombia, new management proposed six. One, Brava, was aimed at young, affluent partygoers and marketed as an energy drink, with the word cerveza appearing only in tiny letters. The parent company also introduced its Italian lager, Peroni, with the goal of making it the best-known Italian brand in Colombia after Ferrari and Gucci. Old standby Pilsen was being positioned as the beer for the working class and reclad in a bigger bottle that would allow the company to charge a higher price. Similar marketing strategies were being planned for Ecuador and Peru.

KEY DATES

1889:: Founding of the Bavaria brewery in Bogotá.
1931:: Bavaria and other breweries are consolidated as Cervecería Unión S.A.
1967:: Barranquilla-based Cervecería Águila, S.A., is merged into Bavaria.
1981:: Bavaria becomes a public company, selling shares in Bogotá.
1994:: Bavaria begins producing nonalcoholic beverages but makes little headway.
2002:: Bavaria is making beer in Ecuador, Panama, and Peru as well as Colombia.
2005:: The company is sold to SABMiller plc for an estimated $7.8 billion.

Bavaria's operations in Peru came to an end, though, in 2007, when SABMiller paid its new subsidiary $703 million for its shares of UCP Backus y Johnston (which by this time was about 93 percent owned by Bavaria). Bavaria then used $494 million of the money to pay down debt. Its former subsidiaries in Ecuador and Panama were, like Bavaria itself, being listed as separate companies under two SABMiller holding companies for Latin America.

Robert Halasz