Financial Mail - Investors Monthly
HOW MUCH GROWTH CAN AB INBEV TAP?
Huge acquisitions have been part of AB InBev’s culture since it set out to become the most powerful player, writes
Anheuser-Busch InBev (AB InBev) is the beer industry’s undisputed giant, weighing in with a US$200bn market cap, 500 beer brands — including seven of the world’s 10 most valuable — and revenue that will hit $54bn this year.
These credentials alone make AB InBev worthy of attention by any SA investor looking for exceptional global diversification.
But CEO Carlos Brito is still far from satisfied with the group’s scale, despite having closed the $103bn acquisition of SABMiller just 10 months ago. He has set his sights on almost doubling annual revenue to $100bn by 2022 at the latest. It is a huge ask and one that speaks volumes of the superambitious Brazilian’s relentless quest for scale.
The $100bn goal is what the brewer terms an “internal stretch target” and has as a huge carrot on a stick the 2020 Dream Incentive Plan. Share option-based, the plan is potentially worth $350m or
What appeared to have the makings of a close relationship between the two groups ended abruptly in December 2016
more in total to the 65 senior managers —excluding Brito and his 15 top-ranking executives — it has been extended to.
For AB InBev to move the revenue needle meaningfully towards the $100bn mark it will have to find another megascale target. The name of Coca-Cola has long been bandied about by the market in this regard.
Though Brito has publicly stated that AB InBev’s first choice when it comes to acqui- A sign advertising Castle Lager stands on an exterior wall at the SABMiller Alrode brewery and bottling plant, a unit of Anheuser-Busch InBev, in Johannesburg. Anheuser-Busch InBev plans to spend R2.8bn on SA plant extensions and two new packaging lines for returnable glass bottles. Picture: BLOOMBERG sitions is in the beer market, a move into soft drinks, where it already has significant experience, would not seem to be beyond the realms of possibil-
ity. It would also enable AB InBev to avoid the challenges from competition authorities that another major beer industry acquisition would bring.
With a market cap of $195bn and annual revenue of $39bn Coca-Cola would be a needle mover of note. But chances of AB InBev making a move on Coca-Cola are now looking very slim.
What appeared to have the makings of a close relationship between the two groups ended abruptly in December 2016, when AB InBev agreed to sell the 54.5% stake in the $3bn annual revenue Coca-Cola Beverages Africa (CCBA) it inherited from SABMiller to Coca-Cola for $3.2bn.
The deal is set to be closed before the end of 2017.
Though Brito may yet surprise the market with a move on Coca-Cola, a more likely target could be PepsiCo.
PepsiCo’s $63bn market cap is somewhat smaller than Coca-Cola’s. But its annual revenue of $63bn in 2016 was far higher than Coca-Cola’s, and would catapult AB InBev’s revenue to more than $115bn.
The revenue difference lies in the product mix. Coca-Cola’s focus is on beverages, but PepsiCo derives about half its revenue from beverages and the rest from its food brands.
What seems to make a deal between PepsiCo and AB InBev all the more conceivable are the already strong ties between them. They come through AB InBev’s Brazilian subsidiary AmBev, which since 2000 has been the exclusive bottler and distributor of Pepsi beverage products in Brazil.
Brazil, with a population of 208m, is ranked by Euromonitor as the world’s eighthbiggest soft drink market on a per capita consumption basis.
Whatever Brito targets as AB InBev’s next acquisition, another megadeal almost undoubtedly lies ahead. Megadeals have been an entrenched part of AB InBev’s culture since it began its march towards becoming the most powerful player in the global beer industry.
The rise of AB InBev began in earnest in 2004 with the $11.5bn merger of two already active acquisitors, Belgian brewer Interbrew and AmBev. Led by Brito, who became CEO in December 2005, InBev, as the company was then called, was just getting into its stride.
Brito signalled his intention to gain market dominance in 2008, when InBev pounced on the US’s biggest brewer, Budweiser brand owner Anheuser- Busch, acquiring it in a $52bn cash deal, then the biggest in the liquor industry’s history.
The company adopted the name Anheuser-Busch InBev and leapt into the position of 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 acquisition of Mexican brewer Modelo in 2013 for $20.1bn.
But Brito’s goal was still to create what he terms “the world’s first truly global brewer”. To do so SABMiller, then the world’s second-biggest brewer, had to be brought into AB InBev’s fold.
SABMiller disclosed an approach by AB InBev on September 16 2015. After a month of haggling SABMiller’s board accepted a £44/share offer, which was later upped to £45/share. It represented a 52% premium on SABMiller’s share price just prior to the September 16 disclosure.
Primarily to placate competition authorities AB InBev went on a grand-scale dismantling of SABMiller.
Gone are SABMiller’s 58%owned US joint venture, sold to its partner Molson Coors for $12bn, and a 49% stake in China’s largest brewer, CR Snow, sold to its partner China Resources for $1.6bn.
AB InBev is looking for big synergies to flow from its SABMiller acquisition, with a target over the next three to four years of $2.8bn
Japanese brewer Asahi also used the opportunity to grow its footprint, buying the Peroni, Grolsch and Meantime brands for €2.5bn and all Eastern European businesses for €7.3bn. Also gone is a 26.4% stake in Distell, sold for an estimated R8.5bn-R9bn.
About half of SABMiller’s original brewing capacity has been shed, as has about $11.7bn in revenue. With the closure of the CCBA deal AB InBev will have completed deals worth about $29bn, or almost 40% of the $75bn debt that it took on board in late 2015 to finance the SABMiller deal.
For AB InBev the big prize SABMiller brought with it was exposure to Africa, the beer industry’s fastest-growing market and one in which it had previously been unrepresented.
It was exposure AB InBev had to have. With the exception of SA, Africa’s beer market is in its infancy, annual per capita beer consumption of 7l running way below the global average of 45l. AB InBev now holds sway in Africa. Operations in 17 countries, including SA, account for 40% of the continent’s beer volume.
The position is strengthened by an alliance with French group Castel, which operates breweries in a further 22 African countries. It represents a powerful combination. The two brewers hold number one position in 30 of the 39 markets they operate in and together account for two out of three beers sold in Africa.
The relationship between SABMiller and Castel dates back to 2001, when they forged an alliance eliminating competition between them. Crossholdings with AB InBev, now owner of a 20% stake in Castel’s African operations, and Castel, an owner of a 38% stake in AB InBev’s African operations outside SA, cement the alliance.
Could acquiring Castel’s African operations be AB InBev’s next megadeal? Brito would surely jump at the opportunity to do what has the makings of a deal that would be worth upwards of $30bn.
Africa proved its value in AB InBev’s six months to June results. Against the background of only 1% growth in group beer volume SA turned in an increase of 4.4%, mostly due to the launch of two of AB InBev’s three global brands, Stella Artois and Corona. In other African countries group beer volumes, fuelled by strong growth in Nigeria, Uganda and Tanzania, rose by double digits.
A master at extracting costs from businesses, AB InBev is looking for big synergies to flow from its SABMiller acquisition, with a target over the next three to four years of $2.8bn. This up from a $2bn target at the start of 2016.
Cost savings are just one factor setting AB InBev up for years of solid earnings growth. Among the beer giant’s expansion strategies are accelerating growth in the higher-margin premium category, particularly in China, Europe, Africa and Latin America.
Also being targeted aggressively is the fast-growing low- and no-alcohol beer segment, which AB InBev foresees will become upwards of 20% of the global beer market by 2025.
AB InBev has also set about reversing falling sales of its third global brand, Budweiser, in its home market. A fouryear, $2bn initiative to improve distribution and marketing to endow Budweiser with, as AB InBev puts it, a “more sophisticated image”, is under way.
A view of what investors can expect from AB InBev is given by a four-year analysts’ consensus forecast of earnings per share (EPS) published by the US Nasdaq exchange. This year EPS is expected to rebound by 49% to $4.22 following 2016’s 44.5% fall on the back of SABMiller deal costs and interest on the debt, raised almost 11 months ahead of the deal’s closing.
EPS are forecast to jump another 21.8% in 2018, followed by improvements of 13.2% in 2019 and 12.7% in 2020.
For good reason AB InBev is tipped by 22 out of 32 analysts polled by Thomson Reuters to outperform the market.