PICK of the MONTH

Financial Mail - Investors Monthly - - Con­tents - Stafford Thomas

PICK OF THE MONTH

With a mar­ket cap of US$198 bn, five of the world’s 10 most valu­able beer brands and sales in more than 100 coun­tries, An­heuser-Busch in­bev (AB in­bev) is big in ev­ery sense of the word. But size alone does not nec­es­sar­ily qual­ify a com­pany as an in­vest­ment to rush into.

In­deed, on AB in­bev’s re­cent per­for­mance the share, on an his­toric 25 price:earn­ings, does not scream out value. In the four years to De­cem­ber 2015 rev­enue grew at a pedes­trian an­nual av­er­age of 3% and EPS at 6.5%.

AB in­bev has in large mea­sure been built on a se­ries of megamerg­ers, so much so that it has led one an­a­lyst to de­scribe it as “a gi­gan­tic pri­vate eq­uity firm”.

The rise of AB in­bev be­gan in earnest in 2004, with the $11.5bn merger of two al­ready ac­tive ac­quisi­tors, Bel­gian brewer In­ter­brew and Brazil­ian brewer am­bev. in­bev, as the com­pany was then called, was just get­ting into its stride un­der the lead­er­ship of the su­per am­bi­tious Car­los Brito, CE since De­cem­ber 2005. Brito sig­nalled his in­ten­tion to gain mar­ket dom­i­nance in 2008 when In­ter­brew pounced on the US’s big­gest brewer, An­heuser-Busch, ac­quir­ing it in a $52bn cash deal.

Then the big­gest deal in the liquor in­dus­try’s his­tory, it re­sulted in the com­pany adopt­ing the name An­heuser-Busch in­bev and be­com­ing the world’s largest brewer. The scale of the group’s ac­quis­i­tive drive is re­flected in rev­enue, which grew by $41.4bn to $52bn be­tween 2004 and 2015. About $19bn of the in­crease came from the An­heuser-Busch ac­qui­si­tion and $6.5bn from the $20.1bn ac­qui­si­tion of Mex­i­can brewer Modelo in 2013.

But still stand­ing in the way of Brito’s am­bi­tion to cre­ate what he terms “the world’s first truly global brewer” was sab­miller.

In 2015 Brito came out ac­quis­i­tive guns blaz­ing, forc­ing sab­miller to dis­close on Sep­tem­ber 16 that AB in­bev had ap­proached it. Af­ter a month of horse trad­ing sab­miller’s board ac­cepted a £44/share of­fer.

An­other hur­dle to­wards get­ting sab­miller share­holder ap­proval of the deal was cleared in July, when AB in­bev’s re­vised of­fer of £45/share (to com­pen­sate for ster­ling’s drop) was ac­cepted by sab­miller’s board.

This took the deal’s value to £79bn, 52% more than sab­miller’s mar­ket cap just prior to the Sep­tem­ber 16 dis­clo­sure.

Ex­clud­ing a fur­ther col­lapse in ster­ling’s value the deal ap­pears on course to be­ing closed on the date set by AB in­bev: Oc­to­ber 10.

What AB in­bev will be get­ting is a very scaled-down ver­sion of a sab­miller that was built into a global gi­ant be­tween 1993 and 2012. Gone will be sab­miller’s 58%-owned US joint ven­ture, sold to its part­ner Mol­son Coors for $12bn, a 49% stake in China’s largest brewer CR Snow, sold to its part­ner China Re­sources for $1.6bn, and all busi­nesses in Cen­tral and Eastern Europe. sab­miller will have shed about half its brew­ing ca­pac­ity.

For Brito the big prize is sab­miller’s in­ter­ests in Africa, the only con­ti­nent where AB in­bev is un­rep­re­sented.

“AB in­bev needs sab­miller far more than sab­miller needs AB in­bev,” says Claude van Cuyck of Denker Cap­i­tal.

sab­miller’s op­er­a­tions in 17 African coun­tries in­clud­ing SA ac­count for 40% of the con­ti­nent’s beer vol­ume. It is a po­si­tion greatly strength­ened by a close al­liance with French group Cas­tel, op­er­a­tor of brew­eries in a fur­ther 22 African coun­tries.

De­spite eco­nomic head­winds, Africa’s beer mar­ket re­mains re­silient. In its year to March sab­miller re­ported a 5% growth in beer vol­umes and an 11% rise in earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (Ebitda) on a con­stant cur­rency ba­sis. By con­trast, AB in­bev in the six months to June re­ported a 7.3% fall in vol­umes in its key emerg­ing mar­ket re­gion, Latin Amer­ica. In 2015 it was its big­gest profit gen­er­a­tor, ac­count­ing for 37.2% of Ebitda of $16.84bn. The North Amer­i­can mar­ket con­trib­uted 36.5%.

AB in­bev will be go­ing it alone in terms of top man­age­ment in Africa, hav­ing opted not to re­tain the highly ex­pe­ri­enced Mark Bow­man, MD of sab­miller Africa. The de­ci­sion has raised more than a few eye­brows. In Brito’s tra­di­tion of culling an ac­quired com­pany’s top man­age­ment, only Mauri­cio Leyva, now SA Brew­eries MD, will re­main, but as pres­i­dent of AB in­bev’s Mex­i­can op­er­a­tions.

A rude cul­ture shock awaits sab­miller man­age­ment not in line for huge golden hand­shakes such as the R1.2bn await­ing CE Alan Clark. They will bear the brunt of the ruth­less cost-cut­ting and aus­ter­ity for which Brito is renowned. The plan is al­ready in place. Brito in­tends ex­tract­ing $1.4bn in an­nual cost sav­ings out of sab­miller in its first four years in the AB in­bev fold, as well as $1.05bn/year in sav­ings sab­miller tar­gets by March 2020.

In time sab­miller should boost AB in­bev’s earn­ings. But that is some way off. A con­sen­sus fore­cast by 23 an­a­lysts polled by Thomp­son Reuters is that AB in­bev’s 2016 EPS will be 22% down on 2015, af­ter a 12.4% fall in the six months to June, a pe­riod in which bonds is­sued to pre-fund the sab­miller deal boosted net in­ter­est pay­ments by $1.48bn to $1.95bn. The fore­cast places AB in­bev on a for­ward 31 PE to De­cem­ber. Fore­casts in­di­cate a 26 PE in 2017, a level still leav­ing AB in­bev in ex­pen­sive ter­ri­tory. ■■

A cul­ture shock awaits sab­miller man­age­ment not in line for huge golden hand­shakes

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