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

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

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.

Pic­ture: BLOOMBERG

Bot­tles of SABMiller beer brands in­clud­ing Cas­tle, Car­ling Blue La­bel, Hansa Pilsener, Milk Stout, Per­roni Nas­tro Az­zurro and Redd’s.

Pic­ture: BLOOMBERG

Car­los Brito, CEO of An­heuser-Busch InBev.

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