PICK of the MONTH

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