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The Beer Behemoth Abinbev - the Golden Eagle of Brewing

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The Beer Behemoth ABInBev - The Golden Eagle of Brewing M.Sc. Finance and Investment Supervisor: Master Thesis Palle H. Nierhoff Date: 14.09.2016 Authors: Pages: 116/120 Caspar Wergeland Characters: 270.881/273.000 Nikolaj Grinsted The Beer Behemoth Caspar Wergeland & Nikolaj Grinsted Executive Summary ABInBev is the biggest brewing company in the world. Originated from a series of acquisitions it has grown into a real beer behemoth. With the backing of 3G Capital and its three founders Jorge Lemann, Carlos Sicupara and Marcel Telles these three Brazilians stand behind some of the biggest mergers in history. Growing companies through mergers and extensive cost-cutting have proven a successful strategy. Now the company is experiencing declining growth, as demand for beer has stagnated. SABMiller is the world’s second biggest brewing company. With roots in South Africa, they have through a series of mergers and acquisitions, built up the company to a major player in emerging markets. Local presence and advanced distribution networks have made this company a global player. With significant earnings in Latin America and Africa the company is present in many of the markets ABInBev is not. With growth stagnating ABInBev has sought to buy SABMiller for a record 104-billion-dollars. We have in this paper investigated if this value makes sense for an individual investor from the side of ABInBev. We have first done two valuations of the companies, and then merged them to see what synergies could be achieved. Our analysis shows SABMiller company that before the rumors of the merger is over-valuated. We found, based on our cash flow models, a market value of equity at 62.119-billion-dollars equaling a share price of $45. The market value of equity at the point when the rumors started was $75 billion, a significantly larger amount. For ABInBev our valuation was very close to the original price, and we ended up with an estimate 1.182-billion- dollars lower than the price in September 2014. This leads to a market cap of 175.274-billion-dollars and a share price of $109. According to our estimates, this deal will destroy shareholder value for ABInBev investors. The synergies we have with included in our estimates found a deal value at 79.053-billion-dollars. This means realized synergies for 18-billion-dollars. This is a significant deviation from the price paid, but still way below what the market believes is the right price. We believe the rationale for this merger is the entrance into two key markets. Africa and the rest of Latin America. These are markets with high entry barriers, where SABMiller in some markets is close to a monopoly. However, we do not see the price paid being recouped in future growth in these markets. In Latin America, there is room for cost cuts, and Africa is the last proper growth market for beer. Africa is also a very risky market, something we have discussed further in our analysis of Africa. We believe the management of ABInBev has taken a bigger bite than they can chew. They have a strong track record, but own success could always blind one. Page 1 of 116 The Beer Behemoth Caspar Wergeland & Nikolaj Grinsted 1.0 Introduction ................................................................................................................................................................... 8 1.1 Problem formulation & research questions ...................................................................................................... 8 1.2 Methodology ................................................................................................................................................................... 9 1.2.1 Introduction............................................................................................................................................................. 9 1.2.2. The strategic analysis ............................................................................................................................................. 9 1.2.3 The financial analysis .......................................................................................................................................... 10 1.3 Limitations and assumptions ..................................................................................................................................... 10 1.4 Motivation .................................................................................................................................................................... 11 2.0 The beverage industry ................................................................................................................................................ 11 2.1 Beer market history ..................................................................................................................................................... 12 2.2 Beer market today ....................................................................................................................................................... 13 2.2.1 Industry characteristics ....................................................................................................................................... 13 2.2.2 Market trends ....................................................................................................................................................... 13 2.2.3 Beer market value chain...................................................................................................................................... 15 3.0 The alcoholic beverage industry ............................................................................................................................... 15 3.1 Customers ..................................................................................................................................................................... 16 3.2 Suppliers ........................................................................................................................................................................ 16 3.3 Buyers ............................................................................................................................................................................ 17 3.4 Competition ................................................................................................................................................................. 17 3.5 Substitutes..................................................................................................................................................................... 17 3.6 M&A activity in the world beer market ................................................................................................................... 17 3.6.1 The M&A history of Heineken: ........................................................................................................................ 19 3.6.2 The M&A history of Carlsberg: ........................................................................................................................ 20 3.7 Why do an M&A? ....................................................................................................................................................... 21 4.0 SABMiller ..................................................................................................................................................................... 24 4.1 History ........................................................................................................................................................................... 24 4.2 Today ............................................................................................................................................................................. 25 4.2.1 Strategic fit – as a target ...................................................................................................................................... 25 4.2.2 Culture ................................................................................................................................................................... 26 4.3 Markets and sales ......................................................................................................................................................... 26 4.3.1 Africa ..................................................................................................................................................................... 26 4.3.2 Asia ........................................................................................................................................................................ 27 4.3.3 Europe ................................................................................................................................................................... 27 4.3.4 Latin America ....................................................................................................................................................... 27 4.3.5 North America ..................................................................................................................................................... 27 Page 2 of 116 The Beer Behemoth Caspar Wergeland & Nikolaj Grinsted 4.4 Company structure ...................................................................................................................................................... 28 4.4.1 Ownership structure...........................................................................................................................................
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