It's Miller time for South Africans

SOUTH African Breweries today shrugged off the mantle of brewer to the developing world with the $5bn (£3.4bn) takeover of mainstream American giant Miller. From its position as an unglamorous number six in the global league, in one gulp SAB becomes the world's second largest brewer.

The purchase from Marlboro cigarettes group Philip Morris sees it leapfrog the likes of Heineken and Carlsberg, as well as current number two Interbrew, in the world league. But when SAB announced its intention to float in London in 1999, the response from many in the City was 'Who?' Apart from visitors to Africa, China or eastern Europe, most potential investors had not heard of its 100-plus beer brands, let alone drunk one.

If your broker had told you that within three years it would be second only to Budweiser owner Anheuser-Busch in the world beer rankings, you would have accused him of swigging one too many pints of Tyskie - SAB's market -leading beer in Poland. Until SAB declared it was Miller time today, its biggest brands were Castle, South Africa's most popular beer, and Pilsner Urquell, the malty Czech lager it hopes to turn into an international brand. SAB is paying Philip Morris in cash and shares in a deal that will make the latter one of its biggest shareholders, with 35% of the company.

Just how well that part of the deal will go down in South Africa remains to be seen. When SAB launched its shares in London, chief executive Graham Mackay faced an outcry. South Africans argued that he was selling out the company's century-long heritage back home, where it had a staggering 98% share of the beer market. The uproar was unsurprising. SAB is as close to South Africans' hearts as the Springboks. It was established in 1895, selling beer to workers in the new mining town of Johannesburg.

But it has already expanded heavily abroad since the abolition of apartheid opened new markets in 1994. Ventures were launched in Tanzania, Zambia, Mozambique and Angola. Then it moved further afield, buying up businesses in China and central Europe.

Last year, it was the FTSE 100 index's most prolific dealmaker after WPP, snapping up breweries from Honduras to Romania. But it suffered heavily from weakness in the South African rand - a problem that has dogged the group's attempts to woo new investors.

Therein lies one of the key reasons for today's deal. Miller will bring SAB a serious amount of hard-currency income, $4.8bn in turnover last year. It gets that at a relatively cheap price, buying Miller after a period of poor performance against Budweiser, and inherits a broad US distribution network for its existing beers.

But analysts still fret over whether SAB has the management skills and experience to take on the cut-throat American beer market. Cornering the market in Swaziland is not like beating Budweiser in Boston.

The Miller deal is being read very much as a defensive play from Mackay. A host of recent consolidations in the international beer market has seen Belgium's Interbrew buy Bass, Beck's and Whitbread's beers while Scottish & Newcastle has bought Kronenbourg. Only recently, SAB was being touted as the next possible bid target for Interbrew. Now such a deal seems far from likely.

If SAB handles the integration well, it should boost the brewery's profits, revealed today as being $606m before tax - down from $646m a year ago - to an extent that makes it more likely to be the buyer, not the target, in future consolidation rounds.