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The Case for the Global Megabrewer Here at Tufts, Our Beer of Choice Is

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The Case for the Global Megabrewer Here at Tufts, Our Beer of Choice Is Walker Kehoe Consumer Staples Lead Analyst Tufts Financial Group 12/1/2015 The Case for the Global Megabrewer Here at Tufts, our beer of choice is Natural Light—it’s cheap, easy to drink, and tastes marginally better than Keystone. Natural Light, or ‘Natty’ as we call it, is brewed by Anheuser-Busch InBev (BUD), the multinational megabrewer that recently decided to acquire its closest rival SABMiller (SAB). A potential acquisition was announced by AB in mid-September and finalized on November 11th. The nearly $108 billion deal is complex and hard to swallow, which explains why BUD stock traded horizontally between September and November. In the next few paragraphs, we hope to break down the megadeal and convince you that it’s a good idea. What exactly is AB buying? Understanding why a combined AB InBev SABMiller will be successful requires us to understand what exactly AB is buying. AB is the world’s largest beer producer with a portfolio containing 17 brands with retail sales over $1 billion. Despite the company’s size, they have little to no presence in Africa and Latin America outside of Brazil. These two regions are SABMiller’s top two revenue-generators as shown on the right. Though AB and SAB are the world’s two largest beer companies, they have little SABMiller’s 2015 revenue by region regional overlap. Hence, the combined company will boast a regionally- complimentary brand portfolio. Below is a graphic of the combined company’s global beer production. The yellow represents all the markets that AB can tap into with the acquisition of SAB. Note that in order to appease anti-trust authorities, SAB is selling its 58% share in the MillerCoors joint venture to Molson Coors. So the choice between Natty and Keystone (brewed by MillerCoors) will still be meaningful. Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/29/2021 Walker Kehoe Consumer Staples Lead Analyst Tufts Financial Group 12/1/2015 What are the beer market trends in Africa and Latin America? According to the U.N., 1/5 of the world’s population will reside in Africa by 2025. Between 2008 and 2013, African sales of premium beer brands such as the ones controlled by SAB grew by 12%, while African beer sales as a whole grew by only 6%. Drinking premium beer is viewed as a status symbol and with Africa’s rapidly expanding middle class, AB expects to see volumes increase 44% by 2025. Across the Atlantic, Brazil is the world’s third largest beer consumer (behind the US and China). AB dominates the Brazilian market with over 70% market share. 35% of SAB’s revenue comes from Latin America and the combined company would control 63% of the overall Latin American market. Between 2013 and 2017, Africa and Latin America’s beer markets are expected to grow by 5% and 3%, respectively. Can management pull it off? With such promising platforms for growth, AB must be able to successfully execute its acquisition and subsequent expansion, and that’s where their world- class management team comes in. CEO Carlos Brito has a proven track record of successful M&A forays, including the 2008 merger that created the company from Belgium-based InBev and U.S.-based Anheuser-Busch, and the 2013 purchase of Mexico-based Grupo Modelo. Management claims it will be able to extract $1.4 billion in synergies from the SABMiller deal within four years. The firm will have incredible pricing power and a vertically-integrated distribution network. In their November 11th investor presentation, AB outlined areas in which they expect to extract the $1.4 billion in synergies from SAB as: procurement (20%), distribution (25%), administrative (35%), and best practice sharing (20%). The table below compares key financials of SABMiller, AB InBev, and the industry average. As you can see, Brito and team run a tight ship and crush industry averages. Given management’s history they’re likely to make large improvements to SAB’s financials. SABMiller AB Global Alcoholic Beverage InBev Sector Pre-tax 19.97% 32.28% 19.23% Operating Margin Effective Tax 26.36% 18.00% 22.00% Rage Pre-tax ROIC 14.02% 14.76% 17.16% ROIC 10.33% 12.10% 13.38% Reinvestment 16.02% 50.99% 33.29% Rate Debt to Capital 14.67% 23.38% 18.82% Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/29/2021 Walker Kehoe Consumer Staples Lead Analyst Tufts Financial Group 12/1/2015 But what if we’re wrong? When the potential acquisition was announced in September, investors’ main concern was a lack of information regarding the deal. Now that the deal has been finalized we know how it will be financed, that AB expects to save $1.4 billion in synergies, and that SAB’s 58% stake in MillerCoors will be sold to MolsonCoors for $12 billion. Since November 11th, BUD’s share price has increased by around 10%. Nonetheless, AB faces risks inherent and external to the acquisition. AB’s financing will leave the company highly levered beyond its already above average debt to capital ratio. AB InBev is offering a ‘Partial Share Alternative’ for SAB shareholders who find the cash-offer undesirable. These shares would remain dormant for 5 years but once unfrozen, they will dilute the market of existing shares. In the United States, AB faces increased competition from the craft beer industry. Over the past five years, domestic beer sales volume decreased over 20%, while craft beer sales increased by 14%. AB’s domestic sales only decreased by 10% but the growing popularity of craft beer gives rise for concern. Also, we know AB is selling the MillerCoors joint venture, but they may also be forced to sell SAB’s 49% stake in CR Snow, China’s largest brewery. Conclusion The AB-SAB transaction is expected to take place in the second half of 2016. We believe that, so long as there are no major disasters, the deal will add value to AB InBev. Brito and team should be able to extract value from SABMiller through cost cutting. SABMiller’s existing footprint in Africa and Latin America will allow the company to expand into growing markets. Expansion abroad will help offset declining sales in saturated markets and competition from craft beer. Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/29/2021 Walker Kehoe Consumer Staples Lead Analyst Tufts Financial Group 12/1/2015 References http://seekingalpha.com/article/3601436-winning-at-a-losers-game-control- synergy-and-the-ab-inbev-sabmiller-merger http://www.ab- inbev.com/content/dam/universaltemplate/abinbev/pdf/investors/11November201 5/Investor%20Presentation%20- %20Building%20the%20First%20Truly%20Global%20Beer%20Company%20- Final.pdf Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/29/2021.
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