The “King of Beers,” AB InBev (NYSE: BUD) has had some problems of late. To solve them, the $178 billion maker of Budweiser and Corona is doing what any large company does in that situation. It’s trying to buy a better company and steal their growth.

#-ad_banner-#You may recall the enormous $52 billion merger between Anheuser-Busch and InBev back in 2008. Some investors — and beer drinkers — never truly forgave the maker of Bud for relocating overseas. Yet, I don’t think that’s what’s causing the company’s operating mess today.

AB InBev suffers from the simple problem of too few drinkers. For the first time in 30 years, beer volume is set to decrease globally this year. 

To make matters worse, the major beer makers like InBev have been forced to compete with an explosion of craft beer and smaller breweries like Dogfish Head and New Belgium. 

The volume of craft beer sold in the United States has more than tripled over the last decade:

Meanwhile, brands like Bud, Miller and Coors have been weak. Volume for these brands are falling at about 1.7% annually.
    
Still, the real problem for InBev and its ilk isn’t necessarily craft beers. The big beer makers still control 80% of the U.S. market and have plenty of cash to buy up the most lucrative of the craft companies as they have with Leinenkugel and Shock Top. 

The problem for InBev, specifically, is geography.

Bud, Corona, Stella Artois and the rest of InBev’s brands just don’t sell in the few places where beer sales are still growing — namely Africa and Latin America.

So, over the last few weeks, the management team over at InBev has come up with a solution: buy the only major brewer that IS making inroads to growth market sales.

SABMiller plc (OTC: SBMRF), once the world’s largest brewer (prior to the AB-InBev merger), has poured its marketing efforts into emerging markets. That’s not to say it doesn’t still spend hundreds of millions of dollars on advertising during football games here in the United States. But just look at these figures:

Over the last year, SAB sold 9% more beer on a constant currency basis in Africa, and 7% more in Latin America. And those percentages aren’t just based on some low numbers. Africa is already SABMiller’s largest market — bringing in $7.5 billion annually. Latin America ranks its second largest market with sales of $5.8 billion.

Meanwhile, AB InBev’s largest market — here in the U.S. — had flat sales and a 1.2% decline in earnings in 2014.

The situation is grim for AB InBev in terms of where it will find future growth to right this listing ship. It needs a deal with SABMiller.

Miller has the upper hand. It is still finding room to grow, despite the overall global trend in beer sales. 

It has market share in tough areas to gain a foothold like in much of Africa. 

And it already has a joint venture partnership with Molson Coors Brewing Company (NYSE: TAP), the third largest brewer, to split marketing costs in the United States.

So far, this potential acquisition negotiation is going just like you might expect under these circumstances. 

SABMiller has forced InBev’s hand. After four rejected offers, the two finally agreed to sit down and negotiate it out. Just this morning, the pair tentatively agreed to a $104 billion deal. But there’s plenty left to work out. 

As I said above, InBev needs a deal like this. SAB is in control. Yet, neither of them will be the true winner if an arrangement can be met.

You see, Altria Group Inc. (NYSE: MO) — the $111 billion cigarette giant, maker of Marlboro-brand products in the United States — owns 27% of SAB. Clearly, “sin stocks” stick together.

Altria, as I pointed out earlier this month, spun off its international business back in 2008. That was, in my opinion, a mistake. Just like beer sales, domestic cigarette sales are on the decline in the U.S. While Altria remains a large and powerful company, like AB InBev, it suffers from geography.

So Altria could use a boost from a deal on its SAB shares. The company already announced that it was in favor of InBev’s offers. But SAB’s second largest shareholder, the Santo Domingo family in Colombia, has been holding out for more. We’re yet to hear how this family will vote.

Since InBev needs a deal, and SAB is the likeliest buyout target, Altria’s bonus will only grow.

Still, I’d wait until the two beer giants come closer to finalizing a deal before I’d buy any of these three plays. But the Altria angle will be my first thought if an agreement is finalized. 

Any deal between these companies would be put before regulatory agencies around the world. If it gets to that stage, that will be the time to act on Altria.

There could be significant arbitrage income if you strike at the right time.

Risks To Consider: Cigarette sales are falling much faster than beer sales, which only just this year started to decline. So if you jump the gun on Altria, you could be sitting on several years’ worth of falling tobacco volumes. Granted, MO’s 3.9% dividend yield will ease those sores.

Action To Take: Consider jumping into Altria if the deal between AB InBev and SABMiller gets to the regulatory approval stage. InBev needs a deal. SAB has control of the situation. But Altria could end up being the big winner. 

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