INDEPENDENT RESEARCH Brewers
21st March 2017 Guide to Brewing M&A Brewers
AB INBEV NEUTRAL FV EUR107 After AB InBev has absorbed SABMiller, it will have 27% of the global Bloomberg ABI BB Reuters ABI.BR beer market (in terms of volume) and Heineken will be second on the Price EUR104.15 High/Low 118.8/93.76 Market cap. EUR176,351m Enterprise Val EUR256,029m global rankings with a 10% share. In terms of net revenue, the figures PE (2016e) 26.9x EV/EBIT (2016e) 22.0x are 31% and 11% respectively. That gives plenty of room for the beer
CARLSBERG NEUTRAL FV DKK645 market to consolidate further. In this note we highlight 30 potential Bloomberg CARLB DC Reuters CARCb.CO deals that could be finalised in the next five years. The total value of Price DKK628.5 High/Low 679/576 Market Cap. DKK95,629m Enterprise Val DKK141,220m these deals is USD200bn, concerning 30% of global net revenue in the PE (2016e) 19.8x EV/EBIT (2016e) 17.0x brewing industry.
HEINEKEN BUY FV EUR83 Bloomberg HEIA NA Reuters HEIN.AS Obviously the two main protagonists will be AB InBev and Heineken. For Price EUR79.64 High/Low 84.44/67.97 Market Cap. EUR45,873m Enterprise Val EUR59,416m AB InBev, we have identified 10 potential targets (deal value of PE (2016e) 21.9x EV/EBIT (2016e) 17.2x USD120bn) that could enable the group to double its revenue and surpass
MOLSON COORS NEUTRAL FV $112 the USD100bn mark by 2022. The targets include Carlsberg, Kirin, Castel, Bloomberg TAP US Reuters TAP.N Price USD98.64 High/Low 111.25/92.3 Polar, San Miguel, Sabeco, Zhujiang, Boon Rawd, Damm and Budvar. Market Cap. USD21,204m Enterprise Val USD15,149m Without any doubt the acquisition of Carlsberg would be the most difficult PE (2016e) 32.9x EV/EBIT (2016e) 45.7x to achieve in regulatory terms, but with AB InBev having only strong ROYAL UNIBREW NEUTRAL FV DKK306 market share in Belgium and Luxembourg, the European Commission will Bloomberg RBREW DC Reuters RBREW.CO Price DKK290.8 High/Low 334/248.1 find it difficult to argue for the European Court that a grand scale entry of Market Cap. DKK15,732m Enterprise Val DKK15,802m PE (2016e) 20.1x EV/EBIT (2016e) 16.2x AB InBev in Europe lowers price competition or choice. Also, we believe that the Carlsberg Foundation will be better off as an AB InBev
shareholder than as a standalone Carlsberg shareholder. For AB InBev, 21/03/17 revenue synergies would mostly concern Asia (India and China) whereas in 109 Europe it would be able to implement its stronger cost control tool kit.
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99 For Heineken, we have identified nine potential acquisition targets, which would enable it to more than double revenue and more than triple 94 operating profit. A total deal value of USD70bn might just be too much 89 to close these deals in the next five years. Targets include Molson Coors,
Source Thomson Reuters Tsingtao, Henan Jinxing, Diageo Beer, Petropolis, Royal Unibrew, CCU STOXX EUROPE 600 FOOD & BEV E STOXX EUROPE 600 Beer, Cisneros, Florida Ice & Farm – Beer. However, there are some companies on AB InBev’s list for which it could also have a chance, especially Polar, San Miguel and Boon Rawd.
Analyst: Sector Analyst Team: Nikolaas Faes Loïc Morvan 33(0) 6 11 12 44 44 Antoine Parison [email protected] Virginie Roumage
Cedric Rossi
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Brewers
Table of contents
1. Executive summary ...... 3 2. Investment Case ...... 8 Heineken (Buy, FV EUR83) ...... 8 AB InBev (Neutral, FV EUR107) ...... 8 Carlsberg (Neutral, FV DKK645) ...... 9 Molson Coors (Neutral, FV USD112) ...... 9 Royal Unibrew (Neutral, FV DKK306) ...... 10 3. Europe ...... 11
3.1. Carlsberg ...... 12 3.1.1. Why Carlsberg as a target? ...... 12 3.1.2. Who would like to own the business? ...... 12 3.1.3. What price? ...... 13 3.2. Royal Unibrew ...... 15 3.2.1. Why Royal Unibrew as a target? Mature markets free cash flow ...... 15 3.2.2. Who would like to own the business? ...... 17 3.2.3. What price? ...... 17 3.3. The German beer market...... 18 3.3.1. The last remaining strongholds in Europe ...... 18 4. Africa ...... 20
4.1. Castel – the biggest M&A opportunity ...... 21 4.1.1. Why Castel as a target? ...... 22 4.1.2. Who would like to own the business? ...... 23 4.1.3. What price? ...... 24 4.2. Diageo’s beer business would add (maybe too) nicely to Heineken’s ...... 25 4.2.1. Why Diageo Beer as a target? ...... 26 4.2.2. Who would like to own the business? ...... 27 4.2.3. What price? ...... 28 5. Americas ...... 29
5.1. Molson Coors a prime target for Heineken? ...... 29 5.1.1. Why Molson Coors as a target? Mature markets free cash flow ...... 30 5.1.2. Who would like to own the business? ...... 31 5.1.3. What price? ...... 31 5.2. Who else in North America? ...... 32 5.3. Still a lot to happen in Latin America ...... 33 6. The Asian markets ...... 34
6.1. The Chinese brewers ...... 34 6.2. What about the Japanese brewers? ...... 36 6.3. Numerous targets in Asia...... 37 Price Chart and Rating History ...... 40 Bryan Garnier stock rating system ...... 43
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1. Executive summary In December 2015 (i.e. after the SABMiller deal was agreed), AB InBev set up its “2020 Dream Incentive Plan”, which provides incentives for the 65 top managers to bring the company to turnover of USD100bn by 2022 at the latest. So far, it has been argued that consolidation opportunities in beer are limited and that because of the similarity between beer and soft drinks in producing, distribution and selling, only two external growth opportunities would enable AB InBev to reach the goal: The Coca-Cola Company post refranchising (USD30bn in net revenues in 2020e) and the beverages business of PepsiCo (USD33.9bn net revenues in 2020e).
AB InBev has a global 27% However, we argue that there are still plenty of consolidation opportunities left in beer. After market share and Heineken acquiring SABMiller, AB InBev has a 27% volume share of the global beer market and 31% in net 10% revenues. Heineken is the second largest with a 10% share in volume and 11% in net revenues.
Fig. 1: Global beer market shares
By volume, 2015 PF By net revenue, 2015 PF By operating profit, 2015 PF AB AB AB InBev InBev InBev 27% Others Others 31% Others 53% 33% 29% Castel 17% 1% Castel Hein- Kirin 2% Castel eken 2% Kirin 2% 10% Yanjing Hein- 6% Hein- Carls- eken Kirin 3% CR Carls- eken Tsing- CR Tsing- 10% Yanjing berg 11% 3% Carls- Asahi Tsing- Molson Beer berg tao Molson Beer Asahitao Molson CR 1% Asahi 5% berg 3% tao Coors 6% 6% 2% Coors 2% Yanjing 5% 1% Coors Beer 5% 3% 4% 5% 6% 0% 5% 1%
Source: Canadean, Company Data; Bryan, Garnier & Co ests. Identifying 30 acquisition In this note we have identified 30 possible acquisition targets that represent 31% of global volumes targets which represent 31% and net revenues. These 30 targets span a wide variety of brewers. Some are listed, others are in of global volumes private hands; some are big, others are small (in this note we have looked only at potential targets over 1m hl); there are some in Europe, the Americas, Asia and Africa. The one big market where we have not put anything in from further consolidation is the German beer market, which is an USD8bn net revenue opportunity.
AB InBev to spend Of these 30 targets, we believe that AB InBev is likely to acquire 10, boosting its global volume USD100bn for another 10 market share to 41% (47% in net revenue). Importantly, acquiring these 10 would ( assuming 4% acquisitions which should annual organic revenue growth), propel AB InBev over the USD100bn net revenue mark (any help to double revenue over the next five years rebound in emerging market currencies would come on top). This means that over the next five years, AB InBev would nearly double its revenues and more than double its operating profit. The 10 targets we believe could end up under the AB InBev umbrella are:
Carlsberg is probably the Carlsberg (124m hl) – probably the most difficult to pull off: Carlsberg has a 10% market share most controversial call in Western Europe, 20% in Eastern Europe and 7% in Asia. We believe that getting European clearance for the SAB Miller transaction in Phase 1, was only an excuse to sell off SABMiller’s European assets as this would hinder an acquisition from Carlsberg (and Budvar). It is true that the European Commission argued that in some markets the merger would have removed an important competitor and that in other markets the transaction would have created a substantial link between Molson Coors and the market leader AB InBev/SABMiller. The commission also argued that the merger would have made price coordination easier and more sustainable. However, we believe all these arguments could have been challenged before the European
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Court of Justice. In Europe, AB InBev only has a strong position in Belgium and Luxembourg (where Carlsberg does not) and if it were to acquire Carlsberg it probably would increase competition not decrease (as it is more efficient). Selling Kronenbourg to Asahi would further strengthen Asahi’s position in Western Europe and again lead to more competition. An elegant solution might be that AB InBev forms a joint venture with Carlsberg in the Western European markets but acquires the Asian and Eastern European business where operational synergies would be significant (e.g. increased share in the Chinese and Indian market). The advantage for Carlsberg Foundation would be to obtain access to a larger pool of profits and at the same time, maintain, to a certain degree, control of the Carlsberg brand. However, before any deal with Carlsberg (and independently of what happens with Carlsberg), AB InBev is likely to merge its Russian/Ukrainian operations with those of Anadolu Efes (USD0.5bn net revenue and 14m hl).
But Kirin is another one that Kirin (48.2m hl including soft drinks): Currently the company is desperate to continue as an AB InBev will have to work independent brewer and has acquired some interesting positions outside its home market. on However, with a 6.8% overall operating margin and continued pressure in Australia (after losing the Corona brand back to AB InBev) and the sale of its lossmaking business in Brazil, one wonders if it were not better to sell it. The question will become even more urgent if San Miquel's 51% stake was sold to another major and Kirin is left with a 48% share in San Miquel (Philippines).
Can somebody tell Pierre Castel (24.7m hl beer): Castel is the biggest M&A opportunity in Africa with AB InBev, Castel that his company is seemingly in the driving seat. However, somebody should tell founder Pierre Castel who at the going to be sold age of 90 (!) still continues to look for further expansion in Africa. SABMiller (and now AB InBev) has long been seen as an eventual acquirer of Castel when Pierre Castel relinquishes control. AB InBev already has a cross shareholding. AB InBev has an estimated 22% equity share in Castel and Castel has a 38% share in AB InBev’s African operations outside South Africa. The terms of their agreements have never been discussed but we understand that there is no right of first refusal in terms of change of control of either SABMiller’s previous African business or Castel’s African business. However, we understand that the Castel ownership is split amongst different holding companies, in some of which AB InBev would be able to gain control. Furthermore, Castel’s owner could decide to sell the African beer business if other (African) opportunities arose.
Polar (17.2m hl): Independent brewer with 82% market share in Venezuela might become a target once the Venezuelan political environment is improving.
San Miguel Corporation, Philippines (14.7m hl beer): San Miquel Corporation is 48% owned by Kirin. However, tjis does not seem to mean that the company would fall immediately into its hand if its owner decided to sell. Indeed, in 2014, Ramon Ang, the billionaire owner of San Miguel, was testing the market for his 51% stake in the company for which he received several bids as high as USD6bn. In fact, we believe that if AB InBev placed a bid that could not be matched by Kirin then it would become a target itself.
Sabeco (14.6m hl): Sabeco has a 38% market share in Vietnam where the government is looking to privatise the brewers it owns: Sabeco and Habeco.
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Zhujiang Beer Group (11.6m hl). We believe that AB InBev could be allowed to increase its stake in the Zhujiang Beer group beyond the 30% it already owns. Zhujiang has a 2% market share in China.
Boon Rawd (11.2m hl) is the leading Thai brewer (59% market share in Thailand) and looks at its beer business as a source of funds for expanding in other areas.
Damm (5.2m hl): Damm has a 13% market share in Spain and AB InBev used to own 12% in the company but sold it in 2005. Relations between the two groups have remained amicable.
Budejovicky Budvar (1.5m hl). The government-owned brewer has already been the subject of speculation on an acquisition by AB InBev as both own and dispute the “Budweiser” trademark in different regions. Because of such disputes, Czech Budweiser is sold in North America under the label Czechvar and American Budweiser is labelled as Bud in all European Union markets, except for the United Kingdom, Ireland and Sweden, where both beers are sold as Budweiser.
Reaching USD100bn dream If AB InBev was able to pull off these acquisitions, it would reach its USD100bn revenue target by target by 2022 and through 2022. Furthermore, this does not take into account any possible additional acquisitions (small or big), beer acquisitions nor does it take into account any emerging market currency revaluation. If emerging market currencies rebound to the 2014 level they would also add an additional USD6.0bn in revenue.
Fig. 2: AB InBev to reach Dream USD100bn by 2022
Vol m hl Revenue USDbn EBIT USDbn
AB InBev (2017e) 520.7 55.3 17.9
Acquisitions
Carlsberg 123.6 8.4 1.1
Kirin 48.2 10.3 1.0
Castel 24.7 2.7 0.8
Polar 17.2 0.9 0.1
San Miguel 14.7 1.9 0.5
Sabeco 14.6 1.3 0.2
Zhujiang 11.6 0.5 0.0
Boon Rawd 11.2 1.5 0.3
Damm 5.2 1.0 0.7
Budejovicky Budvar 1.5 0.1 0.0
272.3 28.5 4.8
Organic growth 2% volume, 2% price/mix, EBIT 8%, synergies 20% revenue
82.5 18.2 16.4
AB InBev 2022e 875.5 101.9 39.1
Source: Company Data; Bryan, Garnier & Co ests.
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Heineken has a lot of work The second brewer that would benefit from further acquisitions is Heineken. We have identified nine cut out, potentially acquiring possible acquisitions, which would allow Heineken to more than double its revenue and more than nine brewers to more than triple its operating profit: double revenue
Molson Coors is probably Molson Coors (88.3m hl): All logic should dictate a coming together of Heineken (18% in Latin the most difficult to pull off America) and Molson Coors (27% market share in North America). Not only would it extend a duopoly with AB InBev across the entire Americas continent, but also it could create significant cross selling opportunities in both North America (Heineken brand) and across the globe (Coors Light, Miller). Furthermore, combining the growth opportunities in Latin America with the stable and high cash flows of the North American market are an attraction. The two things holding back an immediate business combination are that Heineken is likely to be unimpressed with the growth profile of Molson Coors and especially MillerCoors in the US, while Molson Coors' family shareholders might be too excited over the MillerCoors acquisition creation of value and start spending their hard-earned cash attempting to create a global brewer.
Entering China through Tsingtao (84.7m hl): We believe that Heineken is best placed to acquire the 20% stake in Tsingtao but only if it has Tsingtao that Asahi has put up for sale. Not only does Heineken currently have no significant something to say stake in China, but also the premium domestic position of Tsingtao is something Heineken would like to build on. Indeed, Heineken will be able to help Tsingtao build its brand in the domestic and foreign markets, while its Heineken brand could benefit from increased Chinese distribution. Moreover, a USD1.3bn purchase price (at current Tsingtao share price) for the 20% that Asahi holds might be an acceptable entry ticket. However, Heineken will only want to spend the money if a proper partnership is created.
Henan Jinxing (23.6m hl): Henan Jinxing has a 5% share of the Chinese market and could be an interesting bolt-on acquisition for Heineken/Tsingtao.
Diageo Beer (18.3m hl): Most of Diageo’s beer volumes are in Africa (68% according to our estimate), but the majority of profits stem from the UK, Republic of Ireland and the US (63% according to our estimate) Heineken should be the most interesting partner for Diageo if it were to use its pan-African distribution network, for Diageo’s spirit brands. Also, Heineken could potentially tap a greater pool of synergies as the company is already present in most of these African markets where Diageo also has a foothold. On the other hand, there will also be bigger overlaps, which could pose regulatory hurdles for approval (Ireland and Nigeria). The overlap in Ireland could be solved by withdrawing the Heineken brand from the Irish market for a couple of years as it is one of the few markets where the brand is mainstream not premium. In Nigeria, divestment of some local brands (Harp, Goldberg and 33 Export) would solve potential (if any) competition issues.
Petropolis (15.8m hl): After acquiring Kirin Brazil, Heineken has a 19% share of the Brazilian market, a full portfolio and must be very pleased with how the business is faring. Nevertheless, adding the 11% share of Petropolis would generate significant synergies and consolidate the Brazilian market even further.
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Royal Unibrew (9.1 m hl): Royal Unibrew is a leading Nordic brewer, which could interest a couple of brewers as a bolt-on. However, we believe that Heineken will ultimately pay-up for the company, which is one of the few Western European external growth opportunities that is left for Heineken. It might be difficult to argue that Heineken sold its Finnish business to Royal Unibrew only four years ago (2013) and that after a successful turnaround (improving operating profit margins from 8.8% in 2012 to 14% in 2015) Heineken would buy it back (more expensively). However, the turnaround could teach Heineken a lot about improving the profitability of some of its country operations.
CCU Beer (7.8m hl): In CCU (Argentina and Chile) both Heineken and Quiñenco already have a 30% share.
Cisneros (3.7m hl): In Venezuela there are still two independent brewers Polar (82% share) and Cisneros (18% share) for whom a normalisation of the Venezuelan political and economic environment could be a catalyst. We assume that AB InBev with its deeper pockets might be willing to bid more aggressively for Polar, which would leave Cisneros for Heineken.
Florida Ice & Farm – Beer (1.4m hl). Heineken has already a 25% stake in Costa Rica’s Florida Ice & Farm.
Fig. 3: Heineken revenue and EBIT 2022e
Vol m hl Revenue USDbn EBIT USDbn
Heineken (2017e) 195.8 20.0 3.4
Acquisitions
Molson Coors 88.3 11.4 1.7
Tsingtao 84.7 4.2 0.2
Henan Jinxing 23.6 0.9 0.1
Diageo Beer 18.3 2.4 0.4
Petropolis 15.8 1.1 0.2
Royal Unibrew 9.1 0.8 0.1
CCU Beer 7.7 0.7 0.1
Cisneros 3.7 0.2 0.0
Florida Ice & Farm - Beer 1.4 0.1 0.0
252.6 21.9 E2.8
Organic growth 2% volume, 2% price/mix, synergies 15% revenue
46.7 9.1 6.2
Heineken 2022e
495.1 51.1 12.5
Source: Company Data; Bryan, Garnier & Co ests.
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2. Investment Case
Heineken (Buy, FV EUR83) Heineken is the brewer with the most diversified source of profits, which significantly reduces country risk. In terms of volumes, Mexico is the largest contributor (15%) followed by Brazil (14%) and Poland (6%) and in terms of profits Vietnam (11%) is bigger than Mexico (10%) and France (7%).
Heineken has a double exposure to growth categories. Not only are developing markets around 63% of its volumes but high-end beers are also 36% of volumes. Indeed, Heineken is the brewer with the highest exposure to high-end beer and we estimate that it makes 60% of profits in that segment. Not only is high-end beer more profitable than mainstream beer (premium is 50% more profitable and super-premium 4x more profitable) it is also growing faster in every region. Over the past decade, premium beer has grown by 3.8% p.a. globally, and super-premium beer by 4.8% p.a. compared to 2.5% for mainstream beer.
With a net debt/EBITDA multiple of close to 2.0x, the company has room for further acquisitions (AB InBev is at over 4.0x). Recently the company has been very focused on increasing its grip on existing businesses: it has untangled its cross shareholding structure with Diageo, has agreed to buy an additional pub estate in the UK (USD1.5bn) and agreed to buy Kirin in Brazil (USD1.0bn). In the short term, we would expect more similar actions (e.g. CCU, Vietnam).
Given the company's widespread business across the globe, it does not have many markets where it is the most dominant brewer, thereby partially explaining its lower operating margin (17% v 32% for AB InBev). However, this should be offset by the far higher share in high-end beers (36% in volumes v 16% at AB InBev) although it is not. The reason is the group's far less aggressive cost management than at its bigger competitor. As a result, the company's free cash flow of USD3.5bn is dwindling compared to the USD20.0bn of AB InBev. This should be a concern for the company and spur it on for more efficiency.
AB InBev (Neutral, FV EUR107) No other management has the same track-record in improving profitability in different economic conditions and in integrating acquisitions. The latest acquisition is SABMiller and we are expecting the company to improve operating margins in the acquired operations to 57.3% in 2020 from 31.5% in 2016 (USD3bn efficiency improvements).
AB InBev has by far the highest operating profit margins in the sector. This also drives higher free cash flow. Operational free cash flow as a percent of revenue is 35% at AB InBev compared to 17% at Royal Unibrew, 16% at Heineken and Molson Coors, 15% at Carlsberg. Generating higher free cash flows also enables the company to absorb increasingly bigger acquisitions.
The company's superior profitability comes from the strict implantation of its world-class efficiency built on Zero-Based Budgeting, the Voyager Plant Optimisation process and managing procurement costs. Supporting the cost efficiencies are the company's high market shares in key geographies. AB InBev has a 100% market share in Ecuador, 98% in Colombia, 97% in Peru, 90% South Africa, 82% in Argentina, 68% in Brazil, 56% in Mexico and 45% in the United States. And these market shares are unlikely to come under pressure any time soon. Indeed, from SABMiller, the company has now
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Brewers been learning more about affordability offerings and is ready to implement this, even in its more mature operations.
After the combination with SABMiller, about 60% of group revenues will come from developing countries where growth in beer consumption tends to be higher. However only 20% of revenues stems from the higher growth high-end beers. The company is addressing this issue through the acquisition of craft brewers, but still has a long way to go.
The company's profits are still geared towards Brazil and the US, which we estimate account for 20% and 35% of operating profits.
Carlsberg (Neutral, FV DKK645) In 2016, Asia was nearly 30% of the company's operating profits, representing the highest exposure among the major brewers. Asia is expected to be one of the two most dynamic beer regions (the other one is Africa) with expected volume growth of 4.3% over the next five years.
The company lost a lot of value through the acquisition in 2008 of the full 100% ownership of its Russian business. Since then that market has continued to decline driven by the macro-economic situation, regulations and devaluation of the rouble. Consumption per capita fell from 78 litres in 2008 to 50 litres in 2016 and for 2017 the figure looks again lower. Despite those pressures on the market, Carlsberg has not been able to use its distribution and brand strength to increase its share in the market. On the contrary, the company's market share has slid to 35% in 2016 from 40% in 2009. Any rebound in beer consumption in Russia will have a disproportional impact on profits.
The Carlsberg Foundation controls Carlsberg through a 30% economic interest and 75% voting control. Hanging on to its independence has been costly with the shares having been flat over the past decade. If the Foundation continues to resist a link up with another brewer, the company risks being left on its own.
Carlsberg often looks like an amalgamation of local businesses with inconsistent pricing across its portfolio (e.g. Carlsberg in the UK is mainstream but premium in France). Sometimes it is difficult to see what binds the company together. Kronenbourg in France does not seem to have much in common with Shancheng in China.
Molson Coors (Neutral, FV USD112) Molson Coors' acquisition of the 58% in MillerCoors that it did not own transformed the company from an also-ran to the third-largest global brewer in terms of profits and a contender for further meaningful additions to its portfolio.
With Molson Coors serving mainly the US, Canada and the UK, volume growth is limited and profits should mainly be driven by cost cutting and premiumisation. However, combining stable earnings growth with financial deleveraging should drive some of the fastest EPS growth in the industry. Indeed, we expect EPS growth of 14% over the coming five years, ahead of the 8-10% we expect for the other brewers.
The company's European assets (UK, Czech Republic, Croatia and Serbia) look weak compared to its North American assets, both in terms of growth profile (decline v stable) and in terms of margin
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(high single digit v 18-19%). A focus on North America with a possible acquisition of Sam Adams, Pabst etc. would sharpen the company's valuation.
Royal Unibrew (Neutral, FV DKK306) With Royal Unibrew being active in mainly mature markets where volumes and prices are under pressure, management is keeping a strong lid on costs. The drive for small cost-efficient operations has allowed operating margins at the company to improve to 15.8% in 2016 from 11% in 2011. If Finland and the Baltics could enjoy an economic rebound, the margin could well reach 20%.
Being close to the operations also has commercial benefits. In Denmark, the company gained share in beer to 16% in 2015 from 14% in 2009 and in 2016, the company boosted Finish volumes by 13% as it looked for ways to cement links with the biggest Finish retailer while promoting product tasting. Furthermore, as a small sized brewer (9.1m hl), most of the company's products are in the sweet spot of profitability and consumer sentiment that increasingly asks for authenticity.
Being in mature cash generative markets allows for a great platform for further acquisitions but in the absence of any suitable projects, the company is buying back shares. If a material acquisition is not forthcoming the company has significant potential to extend its share buy backs. However, the company would be increasingly looked at as a target, offering not only a very good management team that runs its business efficiently, but also the opportunity to extract more value from the company using global cost efficiencies and introducing owned international brands.
Fig. 4: Valuation matrix
local c'cy Share Market Cap P/E EV/EBIT EV/EBITDA FCF Net debt/ Dividend 5yr EPS PEGD price (EURbn) not adj. yield EBITDA yield CAGR 2017 2018 2017 2018 2017 2017 2018 2017 2018 2016 2017
AB InBev EUR 104.2 211.5 22.8 19.7 19.2 16.9 15.7 5.5% 5.1% 4.1 3.6 2.3% 2.3% 10% 1.9
Carlsberg DKK 628.5 12.9 19.8 17.9 17.0 15.3 10.6 6.8% 6.7% 1.6 1.3 1.2% 1.6% 9% 1.9
Heineken EUR 79.6 45.6 20.3 18.9 16.1 14.8 11.8 4.8% 5.4% 2.0 1.6 1.4% 1.5% 8% 2.1
Molson Coors USD 98.7 20.2 26.3 19.5 19.7 17.6 14.4 4.8% 6.1% 5.1 4.4 1.7% 1.8% 14% 1.7
Royal Unibrew DKK 290.4 2.1 19.0 17.7 15.6 14.5 11.9 5.8% 6.2% 0.9 0.9 2.1% 2.3% 7% 1.9
Source: Company Data; Bryan, Garnier & Co ests.
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3. Europe Europe is one of the least The European beer region is one of the least consolidated as brewers based in this region have sought consolidated beer regions in to penetrate regions where growth and margins tend to be higher. This has left Western Europe's the world and the EU Top 3 brewers owning only 38% of the market and the Top 3 Eastern European brewers only 48%. Commission seems to want to keep it that way Following on from that is that there are plenty of opportunities to further consolidate these markets. Sometimes it has been suggested that because of EU regulations, further concentration in the European market is not possible. And indeed, when arguing over the SABMiller acquisition by AB InBev, the European Commission was quick to point out that in some markets the merger would have removed an important competitor and that in other markets the transaction would have created a substantial link between Molson Coors and the market leader AB InBev/SABMiller. The commission also argued that the merger would have made price coordination easier and more sustainable.
However, this might not However, we believe that a Phase 2 investigation or a challenge before the European Court of Justice stand up before the would turn out in favour of AB InBev. Indeed, EU regulation tends to use the impact on consumer European Court of Justice prices as a yardstick to assess mergers and acquisitions. If a merger or acquisition leads to higher prices or less choice, then this should not be allowed to go through without remedies. To assess this risk of raising prices or reducing choice, the regulator looks at market share. A 40% market share is regarded as single-firm dominance, but the European regulator will also look in oligopolistic markets for an indication of the elimination of competitive constraints. Clearly all these rules would not prevent further consolidation. On the contrary AB InBev or Heineken further consolidating the Western European markets will increase (not decrease) competition.
Below we look at two specific acquisition candidates: Carlsberg and Royal Unibrew. To find Carlsberg on the list might come as a surprise, but in our view the interests of the Carlsberg Foundation are better served within AB InBev than as a standalone. And we do see a great opportunity for AB InBev to enter the Western Europe market, from which it has held back until now, more significantly. We also see some opportunities in Germany, Spain and the Czech Republic next to a whole series of bolt- on acquisitions (mainly) in the craft brewing segment.
Fig. 5: European market share
Western Europe market share – 2015 volume 270m hl Eastern Europe market share – 2015 volume 224m hl
Heineken 18% Carlsberg Others Carlsberg 10% Other 33% 20% 47% Heineken AB 14% InBev Asahi 10% 14% Molson Rade- Coors Efes berger Mahou- 5% 7% Asahi Molson San 5% AB InBev 3% Coors Miguel 7% 3% 4%
Source: Canadean; Company Data; Bryan, Garnier & Co ests.
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3.1. Carlsberg Carlsberg Foundation is not Carlsberg is controlled by the Carlsberg Foundation, which was founded in 1876 by J. C. Jacobsen, diversified and has a 30% and its purpose, next to running Carlsberg A/S, is to run and fund Carlsberg Laboratory, The economic interest in Museum of National History at Frederiksborg Castle, the Ny Carlsberg Glyptotek (art museum), to Carlsberg fund scientific research, and to run and fund social works. Unlike most other ‘founder’ foundations, the Carlsberg Foundation is not diversified and only has dividend income from Carlsberg A/S, to fund its charitable works. However, there is nothing in the statutes that prevents the Carlsberg Foundation from selling off its beer business to a bigger, more diversified, higher dividend paying group, as long as the structure is in place that it keeps some control on the Carlsberg brand and keeps beer production in Denmark.
Currently the Carlsberg Foundation controls Carlsberg A/S through a 30% economic interest and 75% voting control. Its voting control is through its 98% interest in the A-shares, which have 20 votes compared with two votes for the B-shares. The foundation owns 33.0 million A-shares and 13.2million B-shares (and has been gradually switching more into A-shares). According to its revised statutes (2013) the Carlsberg Foundation has to own enough shares to control at least 51% of the votes in Carlsberg A/S (the previous requirement to own more than 25% of the share capital was dropped). Furthermore, the charter explicitly stipulates that the brewery business is put into a subsidiary in which Carlsberg A/S (possibly through Carlsberg A/S as a holding company) keeps a significant influence necessary for the maintenance of “Carlsberg” as a widely-known and recognised beer brand and for the maintenance of continued beer production in Denmark.
3.1.1. Why Carlsberg as a target? Carlsberg, the shares and the Carlsberg is controlled by the Carlsberg Foundation which uses the income it gets from Carlsberg to company, have do charitable works. With hindsight, it is always easy to point out that the foundation could have had underperformed the rest of far greater financial means to spend on its charitable works if it had been linked up with a competitor. the sector Indeed, over the past 10 years, Carlsberg shares have been flat whereas those of Heineken and AB InBev have doubled. Not only did the two latter shares yield bigger dividends to start with but also growth in dividends has been higher. We believe that these considerations need to play at the Carlsberg Foundation and see the 2015 appointment of Cees 't Hart as the new CEO, as its last attempt to survive as a standalone profitable business or to improve its price tag.
Carlsberg has a 20% market The attraction of Carlsberg for a possible acquirer is its market position in Western Europe (No. 2 share in Eastern Europe and with a 10% share), Eastern Europe (No. 1 with a 20% share) and a number of Asian countries (98% 10% in Western Europe share in Laos, 53% in Cambodia, 36% in Malaysia, 21% in Hong Kong, 12% in India, 8% in Vietnam and 7% in China).
3.1.2. Who would like to own the business? If Carlsberg were to be put up for sale, a good number of brewers would be interested in an alliance, including AB InBev, Molson Coors and Asahi. However, we believe that the overlaps (and divestments) with Heineken would be too much for the group to be interested. Indeed, we calculate that Heineken would have to divest about 45% of the acquired volumes and this would concern 15 countries.
The overlap with AB InBev is also serious and would probably require divesting about 32% of the volumes, but this would only concern five countries and the structure might be easier. With AB InBev selling SABMillers’ European business to Asahi a potential hurdle in Poland (where SABMiller
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held 35% and Carlsberg 19%) has been avoided. Nevertheless, there are two areas of regulatory concern if AB InBev were to acquire Carlsberg:
Russian regulator to allow 1. The first area is Russia/Ukraine where Carlsberg’s share of 32% and 25% adds to AB AB InBev to buy Carlsberg InBev's 35% and 10%. Although the Russian regulator could allow consolidation to 35% share in the or AB InBev sells its Russian market, AB InBev might well want to sell some of its brands (and keep Carlsberg’s!) to competitors. A business to Anadolou Efes combined 67% market share in Ukraine might be less easy to pass, but AB InBev would probably be inclined to sell some of the Carlsberg brands in Ukraine (Lvivske and Slavutich) and keep its flagship market leader Chernigivske. AB InBev also still holds SABMiller’s 24% stake in Turkish brewer Anadolu Efes who holds an 11% share in the Russian market.
Also the French and UK 2. The second area of regulatory difficulties would be in France/UK. In France, Carlsberg’s business need divesting 29% of the market could add to the 12% of AB InBev. A simple solution would be to sell the Kronenbourg business and that would also partially help with the UK regulator. In the UK, adding Carlsberg’s ex Kronenbourg (and Tetley) 9% share to AB InBev’s 18% would increase AB InBev’s share to 27% compared to 22% for Heineken and 17% for Molson Coors, which could be accepted. But maybe Carlsberg could anticipate a bid and withdraw from the UK market. After all, profitability is pretty low (6% operating margin?) and the Carlsberg brand is positioned in the mainstream segment, which is not in keeping with its premium position in most international markets. A withdrawal of the Carlsberg brand from the UK market would not only improve profitability in this market, but would also increase the attractiveness of Carlsberg as an acquisition target.
Next to AB InBev, linking Carlsberg and Molson Coors could make sense and would involve fewer regulatory hurdles (only in the UK), but this is unlikely to be a preferred option for the Carlsberg Foundation as it potentially exchanges one volatile and low margin business for another one.
3.1.3. What price? But Carlsberg could The current share price of DKK610, values Carlsberg at an EV/EBITDA of 10x. Assuming a withdraw its brand from the multiple of 16x would imply a share price of DKK1,210 while an EV/EBITDA of 20x would imply a UK and return years later share price of DKK1,470. At DKK1,470 the shares would be sold at a 2017 P/E of over 40x, but with a more premium offering assuming cost synergies of 10% of revenues then the P/E multiple drops to 22x (and EV/EBITDA to 13.3x). As such, there is potentially significant upside for the Carlsberg Foundation, which could compensate for its dramatic underperformance over the past decade. And the only thing Carlsberg would need to do is gradually withdraw the Carlsberg brand from the UK market, or premiumse it like Heineken once did (withdrawing and returning two years later at a higher price point). In the meantime, Carlsberg could start by selling some off the other unprofitable businesses (as it has been doing and continues to do so), with its German Holsten business potentially able to kick-start consolidation in the German market.
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Fig. 6: Market share concentration through the acquisition of Carlsberg
Carlsberg Carlsberg combined with AB InBev Heineken Molson Coors Diageo Laos 98% 98% 99% 98% 98% Azerbaijan 85% 85% 85% 85% 85% Norway 56% 56% 60% 56% 56% Nepal 56% 60% 56% 56% 56% Cambodia 53% 54% 70% 53% 54% Denmark 52% 53% 55% 52% 52% Lithuania 52% 52% 52% 52% 52% Portugal 46% 46% 92% 46% 46% Finland 41% 41% 43% 41% 41% Cyprus 38% 38% 43% 38% 38% Switzerland 38% 42% 56% 38% 38% Estonia 37% 37% 38% 37% 37% Malaysia 36% 37% 95% 36% 36% Bahrain 33% 33% 57% 33% 33% Ukraine 32% 67% 32% 32% 32% France 29% 41% 58% 29% 29% Belarus 29% 29% 46% 29% 29% Israel 28% 30% 34% 28% 28% Sweden 27% 27% 32% 27% 27% Russia 25% 35% 34% 25% 25% Turkey 24% 25% 24% 24% 24% Latvia 24% 24% 24% 24% 24% Bulgaria 23% 25% 52% 52% 23% Serbia 22% 24% 25% 58% 22% Hong Kong 21% 29% 26% 21% 21% Kazakhstan 21% 24% 21% 21% 21% Greece 20% 22% 74% 20% 20% Singapore 19% 25% 70% 19% 25% Poland 19% 19% 48% 19% 19% Sierra Leone 18% 18% 57% 18% 38% Sri Lanka 16% 16% 31% 16% 16% Croatia 14% 22% 38% 48% 14% United Kingdom 13% 31% 33% 30% 18% Iceland 13% 16% 14% 13% 13% India 12% 35% 61% 12% 12% Moldova 11% 14% 11% 11% 11% New Caledonia 11% 11% 95% 11% 11% Bosnia-Herzegovina 10% 10% 21% 41% 10% Qatar 10% 10% 34% 10% 10% Uzbekistan 9% 9% 9% 9% 9% United Arab Emirates 9% 9% 51% 9% 9% Oman 9% 9% 28% 9% 9% Republic of Ireland 8% 19% 30% 18% 40% Vietnam 8% 8% 31% 8% 8% Italy 7% 17% 38% 7% 7% Malta 7% 7% 7% 7% 7% China 7% 22% 7% 7% 7% Romania 6% 8% 36% 19% 6% Macedonia 5% 5% 7% 10% 5% Albania 5% 5% 8% 5% 5% Angola 4% 4% 7% 4% 4% Algeria 4% 13% 34% 4% 4% Burma (Myanmar) 3% 3% 7% 3% 3% Indonesia 3% 4% 53% 3% 18% Congo (Brazzaville) 3% 3% 94% 3% 6% Georgia 3% 3% 3% 3% 3%
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Carlsberg Carlsberg combined with AB InBev Heineken Molson Coors Diageo New Zealand 3% 12% 38% 3% 3% Ivory Coast 3% 3% 4% 3% 7% Belgium 3% 55% 14% 3% 3% Germany 3% 11% 3% 3% 3% Hungary 2% 8% 27% 16% 2% Nigeria 1% 12% 69% 1% 21% Senegal 1% 1% 1% 1% 1% Slovenia 1% 1% 3% 4% 1% Morocco 1% 1% 13% 1% 1% Spain 1% 3% 27% 1% 1%
Source: Company Data; Bryan, Garnier & Co ests. 3.2. Royal Unibrew A leading Northern Royal Unibrew, with its headquarters in Faxe, Denmark, is a leading regional Northern European European beverages group beverage company (Denmark, Finland and the Baltics) with an additional presence in the premium (beer, soft drinks, cider, beer segment in Italy and in the international malt beverage market. The company produces, markets, water, juice) sells and distributes beer and cider (43% of 2015 sales volumes), soft drinks (44%), malt beverages (7%) and long drinks (6%). Furthermore, Royal Unibrew has a 25% stake in Hansa Borg, the Norwegian no. 2 with a 20% share of the market and a 32% stake in Nuuk Imeq in Greenland.
Owned by financial investors Since 2009, the company’s main shareholder has been the Danish Chr. Augustinus Fabrikker that holds 10.4% (and which also owns 51% of Scandinavian Tobacco Group) and, since 2013, Hartwall Capital that holds 7.1% (the Hartwall family previously owned Hartwall Brewery before it was sold in 2002 to Scottish & Newcastle). Other shareholders are Danish and international institutional investors. There is only one class of voting shares.
3.2.1. Why Royal Unibrew as a target? Mature markets free cash flow Royal Unibrew is a strong regional beverage company, with leading positions in beer, malt and soft drinks, including soda water, mineral water and fruit juices as well as cider and long drinks (RTD). As such, Royal Unibrew is the second largest beverages company (beer and soft drinks) in Denmark and Finland. In Lithuania, it is the second largest brewer and has a no. 3 position in soft drinks. In Latvia, it holds a no. three position in beer and is the largest soft drinks company. In Estonia, its presence is still fairly limited, but it is allowed to sell the Heineken brand (as in the other Baltic countries, Denmark and Finland). And, with the agreement to distribute PepsiCo soft drinks products in Latvia, Lithuania and Estonia (from 1 January 2016), the company is obtaining a footprint through which it can better promote its Cido soft drinks and Meistriti Gildi, Faxe and Heineken beers. In Italy, the company has built a leading position (10% value share) in the super premium beer segment with Ceres Strong Ale. Furthermore, the company has an interesting position in the premium segment for dark malt beverages. The key market areas for Royal Unibrew’s malt beverages are the Caribbean and Africa (West Africa) as well as among ethnic groups from these areas living in and around major cities in Europe (mainly London, Amsterdam and Paris) and the USA (incl. New York, Buffalo, Miami).
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Fig. 7: Royal Unibrew geographic breakdown 2015
Royal Unibrew volume split Royal Unibrew revenue split Royal Unibrew op. profit split Baltic Malt Baltic Malt Baltic Malt countr bev. countr bev. countr bev. 20% and 11% and 5% and export export Finl. export Den. & Den. & Finl. 7% Finl. 7% 32% 11% 37% Germ. Germ. 32% 35% 36% Den. & Germ. Italy 36% Italy Italy 5% 10% 16%
Source: Canadean; Company Data; Bryan, Garnier & Co ests. Management has Royal Unibrew has a strong management team that came on-board in 2008. After years of significantly improved international expansion on the back of cheap credit, Royal Unibrew ran into disappointing results profitability with the financial crisis in 2008. By the end of that year, a new CEO Henrik Brandt had arrived and the “doubling up” strategy was scrapped. Restructuring work started in 2008 already. Reflecting all the changes was the decline in the number of employees from 2,755 in 2008 to 1,635 in 2012 with the EBIT margin rising from 3.2% in 2008 to 14.1% in 2012. With the acquisition of Hartwall (from Heineken), the margin was diluted as Hartwall was running at an EBIT margin of 8.8%. Royal Unibrew’s full management team relocated to Finland for the first couple of years to steer the efficiency drive and indeed significant improvements were achieved (mainly in supply). Over a period of two years, production per employee increased by 14%, extract losses decreased by over 50%, syrup loss declined by 30%, the distribution utilisation rate increased by 9% and electricity consumption per hl went down by 3%. The group’s EBIT margin increased from 12.5% in 2013 to 15.2% in 2015.
Fig. 8: Operating profitability of Royal Unibrew
Royal Unibrew, operating profit margin Western European margins compared 18% 35% 16% 30% Group Western Europe 14% 25% 12% 20% 10% 15% 8% 10% 6% 5% 4% 0% 2%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
Source: Company, Bryan Garnier Source: Bryan Garnier est.
Source: Company Data; Bryan, Garnier & Co ests.
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3.2.2. Who would like to own the business? Lots of potential suiters Royal Unibrew’s business can be added to any existing player except for Carlsberg. There is a wide variety of local brewers who could be interested in view of the access to modern brewing practices, financial gearing, free cash flow profile, access to market. Under this caption, we would add names like CRB, ThaiBev, Efes, Damm, just to name a few. Both Molson Coors and Asahi could also be interested given Royal Unibrew’s access to some of the Nordic markets. Both companies could also use the management expertise of Royal Unibrew to turn around some of their local business. Indeed, Royal Unibrew boasts a 15.2% operating profit margin in Western Europe, which is the second highest after AB InBev. For Molson Coors, a link with Royal Unibrew would not prevent a further tie-up with Heineken, given that Heineken beers are distributed by Royal Unibrew and since Heineken used to own the Finnish business (but sold it because of the extensive amount of soft drinks).
But in the end Heineken Meanwhile, Heineken itself could be increasingly interested. It sold its Finnish business to Royal should pay up Unibrew only four years ago (2013) but the successful turnaround that Royal Unibrew achieved with the business (improving operating profit margins from 8.8% in 2012 to 14% in 2015), could teach Heineken a lot about improving the profitability of some of its country operations. What did RU do differently?
Interest from Molson Coors in Royal Unibrew would probably not provoke a counter bid from Heineken, however the entry of Asahi (danger of replacing Heineken beer with Asahi) or CRB (a Chinese competitor who might like to have the expertise to build its own Chinese premium business) probably would. Next to Heineken, there is always the possibility that AB InBev is interested in case an approach to Carlsberg does not materialise in a combination.
3.2.3. What price? On the one hand, Royal Unibrew has mainly mature operations that are highly cash generative and which can create value in a low interest rate environment. Furthermore, although there is hardly any geographic overlap, there are synergies applying best practices at Royal Unibrew to the operations of the acquirer. If Asahi was happy to pay 22x EBITDA for the Dutch, Italian and UK craft business of AB InBev, then we believe a similar multiple would be appropriate for Royal Unibrew. A range of 16x EBITDA to 22x EBITDA would yield a value of USD2.9bn and USD4.1bn, which imply share prices of DKK395 and DKK540 both well ahead of the current DKK270 (45% and 100% upside).
Fig. 9: Royal Unibrew market share in selected markets
Royal Unibrew Royal Unibrew combined with
AB InBev Heineken Molson Coors Asahi
Finland 24% 24% 26% 24% 24%
Latvia 22% 22% 22% 22% 22%
Lithuania 21% 21% 21% 21% 21%
Denmark 19% 20% 22% 19% 19%
Iceland 7% 9% 7% 7% 7%
Italy 2% 12% 33% 2% 22%
Ghana 1% 52% 1% 1% 1%
Source: Company Data; Bryan, Garnier & Co ests.
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3.3. The German beer market Consolidation should be Over the past 10 years, there has been no further consolidation in the German beer high on the agenda industry with the top eight brewers accounting for 57% of the market in 2015, exactly the same as in 2005. The only group that still clearly states that it is looking to consolidate the market is Radeberger, but all the other brewers have been very quiet about their German business. AB InBev, Heineken and Carlsberg do not mention Germany anymore in their conferences although their brands Becks, Paulaner and Holsten remain widely recognised.
However, beer consumption per head is now around 100l compared to 120l in 2000 and has been declining in a straight line since 1980 (beer consumption per head was 146l). That has to bring about further consolidation, but it could take another 10 years before there is some meaningful consolidation. Meanwhile some of the majors just need to hang in there and wait. Nevertheless with Carlsberg’s Holsten now selling 40% less volumes than 10 years ago, there could be some urgency to sell the business rather quickly.
Fig. 10: German beer market shares by volume, Fig. 11: Beer consumption in Germany 2015 (litres per capita)
Brau 130 Krombacher Oettinger Holding 6% Warsteiner 125 Bitburger 6% 6% 4% 8% 120 Carlsberg A-BInBev 3% 115 9% 110 105 Radeberger 14% Others 100 44% 95 90 85 80
Source: Canadean; Bryan, Garnier & Co ests.
3.3.1. The last remaining strongholds in Europe Who wants to have a slice of One of the biggest European based brewers is the Turkish player, Efes Beverages Group, Turkish beer? that has a 72% share in Turkey, 72% in Moldavia, 55% in Georgia, 41% in Kazakhstan, 28% in Serbia and an 11% share in Russia. The company's total production is just shy of 20m hl, of which nearly half in Russia. AB InBev owns 24% of Efes and could be tempted to further the relationship by merging its Sun Interbrew Russian operations with those of Efes. Not only would there be a significant level of costs synergies but also strategically, it would fit both companies. Efes would be able to dilute its Turkish business (which is increasingly under attack from more stringent laws restricting alcohol consumption) and AB InBev would be able to set itself up to acquire Carlsberg. However, unfortunately for Efes, no one is likely to invest and buy out the core Turkish business.
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Fig. 12: Efes beer business and Russian market share
Efes Beverages beer volume, 2015 Volume market share Russia, 2015 Moldova Kazakhsta Georgia 4% n 3% 11% Serbia Turkey Others Carlsbe 6% 29% 28% rg 34% Heineke Russia n AB Efes 47% 12% InBev 14% 12%
Source: Canadean, AC Nielsen; Bryan, Garnier & Co ests.
More interesting The second opportunity in Europe is Spain. Heineken already has 27% of the market opportunities in Spain – and in January of this year, AB InBev acquired Madrid-based craft brewer La Virgin. Damm to go to AB InBev? However, the biggest Spanish brewer Mahou-San Miguel (28% stake in Spain and 68% in Equatorial Guinea, 11.2m hl) aims to remain independent and become a craft beer reference (?). However, we believe that Damm, which owns 13% of the Spanish market (5.0 m hl) might be more keen on linking up with one of the majors. AB InBev used to own 12% but sold it in 2005 and has kept good relations. Alongside the medium sized brewers there are plenty of small brewers in Europe that could be considered as bolt-on acquisitions. A couple of names in Eastern Europe include Obolon (4m hl and 22% market share in Ukraine), Ochakovo (2m hl and 2% market share in Russia) and Inter-Rohat (1.1m hl and 46% market share in Uzbekistan). But there are also some interesting smaller potential opportunities in Western Europe that include Czech Budvar (1.4m hl) – which has already been the subject of speculation on AB InBev, Belgian craft brewer Duvel-Moortgat (1.4m hl).
Fig. 13: Budvar and Duvel Moortgat volume split Budvar volumes 2015 Duvel Moortgat volumes 2015 Croati Czech Servia Russia Hugar a France Republic 2% 2% y UK Poland 1% Netherl. 5% 5% Austri UK 2% Others 1% 7% 5% a 4% 1% Slovak 4% Republ ic USA Belgium 8% Czech 40% 44% Repbu lic 49% Germa ny 20%
Source: Canadean
Source: Canadean, Bryan, Garnier & Co ests.
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4. Africa In terms of the weighted The African and Middle East beer market is to a large extent consolidated with AB InBev owning average market share, Castel 35% of the market, Heineken 24%, Castel 21% and Diageo 10%. Furthermore, on a country level the and AB InBev have consolidation is even stronger and on top of that AB InBev and Castel have cross participations (AB respectively 57% and 55% in their African markets InBev has 20% in Castel’s African operations and Castel has 38% in AB InBev’s African operations) and have promised not to compete in each other’s territories. In terms of weighted average market share, Castel and AB InBev have respectively 57% and 55% in the African markets where they are present. Diageo has 28% as it has a more concentrated business in East Africa and Nigeria. Heineken has a weighted average share of 25%, which is not that much different from its overall 24% share in Africa as the company has the widest African presence.
The two big opportunities for further consolidation of the African market are Castel and Diageo’s Beer business. These two opportunities are discussed below.
Fig. 14: Market share in Africa
Africa and Middle East volume market share, 2015 Weighted market share in Africa, 2015 Namibia SFBT Others 57% 55% Breweries 1% 7% Diageo 2% 10% AB InBev 35% Castel 28% 25% 21% Heineken 24%
Castel AB InBev Diageo Heineken
Source: Canadean; Bryan, Garnier & Co ests.
Fig. 15: Volume share in AME outside top 4, 2015
Brasserie Habesha Egyptian Asmara Star 2% Int. 2% d`Algerie Dashen Raya 2% 5% Ucb 1% 4% 3% Mahou- Other San 31% Miguel 5% Tempo Namibia 6% SFBT Breweries 11% Unibra 20% 8%
Source: Canadean; Bryan, Garnier & Co ests.
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More African opportunities Outside Castel and Diageo Beer, there are still a number of operations feasible, but in some cases, it than Castel and Diageo Beer seems unlikely that the major players will be interested:
Namibia Breweries: Namibia Breweries has a 69% share in Namibia and 3% in South Africa. Heineken already has a 29.9% share in the company alongside O&L with 30.1% (the remaining 40% is listed). Societe Frigorifique des Boissons de Tunisie: SFBT has a 76% share in Tunisia of which Castel already owns 49%.
Unibra: Unibra has 12% in the Congo, 7% in Rwanda, 30% in Guinea and 10% in Madagascar. The Belgian-owned company is focused on beverages and property in Africa.
Tempo: Tempo Beer Industries is Israel's largest brewer with a 43% market share and has been importing Heineken since 1992. Competitor CBC group, that also distributes Coca-Cola, has bought Carlsberg’s Turkish (2001), Israeli (2008) and United Romanian Breweries interests (2017).
Ethiopia: The attractive profile of the Ethiopian beer industry (CAGR 40% in 2005-2015) has drawn interest from different start-ups in the market. Castel is the market leader with 38% followed by Heineken with 32% and Diageo with 13%. Furthermore, there are three start-ups, which all seem to be struggling in terms of profitability for the moment. As such, it is probably unlikely that these start-ups will be acquired by any of the majors for anything more than their net asset value. Dashen Brewery has 8% in Ethiopia and is co-owned by the Vasari group (South African origins), UK-based asset management firm Duet and the TIRET Group, an Ethiopian endowment fund. Raya Brewery has 5% in Ethiopia and a diverse number of founding shareholders and was loss-making in its first two years of operations. Habesha Brewery has a 4% market share in Ethiopia and its largest shareholder is the Dutch group Bavaria (43%).
UCB: Union Camerounaise des Brasseries is owned by billionaire Kadji DeFosso. It has a 7% share in the Cameroon beer market (Castel has 78% and Diageo 14%). The Asmara Brewery has a 100% share in the Eritrean market but is unlikely to be the subject of any approach until the political environment calms down.
Brasserie Star d’Algerie has a 9% market share in Algeria but finds it difficult to compete with Castel that has a 41% share and Heineken that has 30%. As the company has already been around for about 10 years, its brands Albrau and Koelberg have a certain recognition and could appeal to one of the majors as a bolt-on acquisition. 4.1. Castel – the biggest M&A opportunity Castel is the biggest M&A opportunity in Africa with AB InBev seemingly in the driving seat. However, somebody should tell founder Pierre Castel who at the age of 90 (!) still continues to look for further expansion in Africa. Recently Castel have shown interest in Coca Cola Beverage Africa (previously owned by AB InBev/SABMiller) and could, in our view, also be interested in Diageo’s beer business.
The Castel Group is a French beverage company that was established in 1949 by Pierre Castel who still runs the company. Starting with a wine merchant business in Bordeaux, Castel grew into wine bottling, followed by the acquisition of viticulture lands and brands and, later, distribution by buying the Nicolas wine specialty stores (1998).
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In 1990, Castel entered the African beer business through the acquisition of Brasseries et Glacières Internationales and in 1994, added La Société de Limonaderies et Brasseries d'Afrique (SOLIBRA) that focused on soft drinks. More acquisitions followed: Brasseries du Maroc (2003), Brasseries Star Madagascar (2011), and Nouvelle Brasserie de Madagascar (2014).
Castel is the third largest The Castel group is the third-largest brewer in Africa with a particularly strong footprint in northern brewer in Africa Africa. It is a leading brewer in 21 countries in Africa, and in 15 of these, also produces and distributes Coca-Cola products. We estimate that 29% of the groups’ African volumes concern beer (27m hl), 45% in revenue and 59% in operating profit (with beer carrying higher net revenue per hl and operating margins).
Fig. 16: Castel business breakdown
Castel Africa volume split Castel Africa revenue split Castel Africa op. profit split
Soft Beer drinks 29% Beer 45% 41% Soft drinks Beer 55% 59% Soft drinks 71%
Source: Canadeanta; Bryan, Garnier & Co ests.
4.1.1. Why Castel as a target? We believe there are four main attractions for the majors to be interested in Castel:
1) Its operations are geared towards the higher growth beer markets of Africa. Beer consumption growth in Africa is expected to be 4% p.a. over the next decade (driven by population growth and gaining share from the informal alcohol market) compared to 1% for the global beer market;
2) Castel sells beer in 22 African markets and in 15 of them it is market leader with a more than 50% share of the market, which is one of the reasons why the company has profitable beer operating margins of 30%.
3) The company has a pan-African market share (excluding South Africa) of 27%, which could add well to the 18% belonging to AB InBev and 30% to Heineken in the same region.
4) Although managed with a strong efficiency culture, the company’s margin could be enhanced by combining it with a bigger group.
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Fig. 17: Growth in beer volume consumption in Africa
Volume growth by region 2010-2015 Drinking local brew malwa in Uganda 5% 4% 3% 2% 1% 0% -1% -2% -3%
Source: Canadean; Bryan, Garnier & Co ests.
Fig. 18: Market share in Africa
African market share 2015 African market share ex. South Africa, 2015
Namibia SFBT Others SFBT Others Breweries 1% 7% Namibia AB InBev 1% 9% Diageo 2% Breweries 18% 10% 2% AB InBev Diageo 35% 13% Castel Heineken 21% Castel Heineken 30% 27% 24%
Source: Company Data; Bryan, Garnier & Co ests.
4.1.2. Who would like to own the business? All brewers with global but also regional aspirations are likely to be interested in Castel's African operations. However, we believe that in reality, only two could make a serious attempt to acquire the company.
AB InBev is in the driving AB InBev: SABMiller has long been seen as an eventual acquirer of Castel when Pierre Castel seat as it has already cross relinquishes control. AB InBev already has a cross shareholding. In 2001, in an attempt to maintain shareholdings monopolistic situations, SABMiller (now AB InBev) acquired 20 percent of Castel's African Beverages operations and Castel acquired 38 percent of SABMiller Africa and SABMiller Botswana. An update of the partnership in 2012 saw the two combine their Nigerian businesses under SABMiller's control with their Angolan businesses handled by Castel. Furthermore, as other SABMiller businesses were
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acquired by Castel including Algeria (40% effective interest) and Morocco (40%), the effective interest in Castel is estimated at 22%.
The terms of their agreements have never been discussed but we understand that there is no right of first refusal in terms of change of control of either SABMiller’s previous African business or Castel’s African business. Indeed, Castel is outside South Africa, bigger and more profitable, so we would find it difficult to imagine that the tables were turned to the advantage of AB InBev. But equally, we are convinced that the relationship with Castel is the most important relation that AB InBev topman Carlos Brito will develop. "It's a very important relationship that we intend to continue to develop and evolve," AB InBev Chief Executive Carlos Brito told investors at a conference call a year ago. Not only is Castel key to global beer dominance, but also the pan-African synergies can create significant value for both Castel and AB InBev.
Heineken: Heineken has been competing with Castel in Africa for a long time and has been increasingly entering some of the countries where Castel held strong positions (e.g. the recent entry by Heineken in Ivory Coast). As a result, there are significant overlaps between the two companies. For example, in Gabon, Castel holds an 80% share of the market and Heineken 12% or in Congo where Castel holds a 40% share and Heineken 48%. In 16 of the 22 Castel markets, Heineken has overlapping positions. In European or US markets this would prevent a tie-up but this is not the main concern in Africa where governments have tax collection and the health of the population as priorities. Hence, we believe that a combination of Heineken and Castel could generate a significant amount of synergies. Furthermore, valued at about USD18bn, the Castel family could become a major long-term shareholder in the Heineken group (Enterprise Value at USD55bn) whereas its "stake" in AB InBev (EV of USD330bn) would be significantly less. Indeed, the Castel families could easily replace Femsa in both Heineken and Heineken Holding (stake valued at about USD13bn adding USD5bn of cash for Heineken).
4.1.3. What price? A USD26.4bn price tag We estimate that the value of Castel Africa is USD26.4bn, of which USD23.7bn for the 78% stake in the original Castel African business and USD2.7bn for the 38% stake it has in the SABMiller African (ex-South Africa) business. Indeed, the valuation of the Castel Group includes two elements:
•78% of its original North African business: to estimate this we base ourselves on the African associates in the SABMiller accounts. From an associates’ EBITDA of USD504m (USD381m operating profit and USD120 in depreciation, we subtract a USD106m combined contribution from SABMiller's 25% stake in Delta and its 26.4% stake in Distell). That leaves USD395m in EBITDA from an average 22% stake or USD1,795m for 100% of Castel Africa. Based on the assumption of beer representing 27% of Castel’s volumes, having roughly double the net revenue per hl than soft drinks and having significantly higher EBITDA margins of 37% (vs 24% for soft drinks), we value the beer business at USD20bn (EV/EBITDA of 20x) and the soft drinks business at USD10bn (EV/EBITDA of 13x based on the recent SABMiller transaction selling to TCCC). 80% of that is USD24bn.
•38% of SABMiller's African business: to value the 38% stake that Castel owns in SABMiller’s African business, we start from an estimated USD575m in operating profit from the African (ex-South Africa) subsidiaries for which we estimate SABMiller owns about 50% on average (from the annual report we know it is between 40% and 60%). If we take 38% from this, then
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we calculate that the 38% stake in SABMiller’s African business has a USD109m operating profit. At 25x EV/EBIT the 38% stake could be valued at USD2.7bn
Fig. 19: Castel market share in selected markets
Castel Castel combined with AB InBev Heineken Molson Coors Asahi
Malawi 99% 99% 99% 99% 99%
Angola 91% 91% 94% 91% 91%
Madagascar 90% 90% 90% 90% 90%
Burkina Faso 88% 88% 95% 88% 88%
Benin 83% 83% 92% 83% 83%
Gabon 80% 80% 92% 80% 80%
Mali 79% 79% 91% 79% 79%
Morocco 75% 75% 88% 75% 75%
Gambia 74% 74% 96% 74% 74%
Niger 68% 68% 68% 68% 68%
Ivory Coast 64% 64% 65% 64% 64%
Central African Rep 64% 64% 97% 64% 64%
Togo 64% 64% 81% 64% 64%
Senegal 63% 63% 63% 63% 63%
Guinea 59% 59% 59% 59% 59%
Algeria 41% 50% 71% 41% 41%
Congo (Zaire) 40% 40% 88% 40% 40%
Ethiopia 38% 38% 69% 38% 38%
Chad 33% 33% 93% 33% 33%
Cameroon 24% 25% 77% 24% 24%
Equatorial Guinea 12% 12% 25% 12% 12%
Source: Canadean; Bryan, Garnier & Co ests. 4.2. Diageo’s beer business would add (maybe too) nicely to Heineken’s Given the limited overlap between beer and spirits in mature markets and the limited presence of Diageo in emerging beer markets, there is no real rationale for Diageo to hold on to its Guinness business. We believe that the most likely scenario would be Heineken buying Diageo’s beer business and agreeing to distribute Diageo’s spirits in those markets where it makes sense.
Diageo’s beer business is centred around Guinness that was founded in 1759 when Arthur Guinness signed a 9,000-year lease on St. James’s Gate brewery in Dublin. And more than 200 years of deal making ended in 1997 with the creation of Diageo (which sold its Burger King business in 2000 and its General Mills’ stake in 2004).
Diageo’s principal brewing facility is at the St James’s Gate brewery in Dublin where capacity was recently expanded to brew all beers sold (not just Guinness) in Western Europe and for global exports in particular to the United States. Furthermore, Diageo has breweries in a number of African countries; Nigeria, Kenya, Ghana, Cameroon, Ethiopia, Tanzania, Uganda, Seychelles. In 2015, Heineken and Diageo swapped assets with Heineken gaining control of their joint operations in the
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Caribbean (Desnoes & Geddes) and Malaysia (GAB). Meanwhile, Diageo increased its stake in Ghana and received USD780.5mlion in cash from Heineken. Earlier in 2015, Diageo and Heineken disentangled their joint ventures in South Africa and Namibia. Heineken ended up with 75% of the South African DHN drinks portfolio and the Sedibeng brewery in Gauteng near Johannesburg, while Namibia Breweries holds the other 25%. Heineken also ended up with 29.99% in Namibia Breweries. Diageo got USD198.4m for its part in the joint ventures. We believe that the underlying strategy for Diageo was to refocus its beer assets on those countries where it needs distribution for its spirits portfolio. But where it is not needed anymore (Caribbean, Malaysia, and South Africa) it seems to be looking to divest. The additional benefit is that by doing so, it disentangled the relationship with Heineken freeing itself to negotiate other deals with different parties.
Diageo is big in East Africa In Africa, its largest businesses are in Nigeria, where it owns 54.3% of a listed company whose and Nigeria principal brands are Guinness, Harp and Malta, and in East Africa, where it owns 50.03% of East African Breweries Limited (EABL). EABL produces and distributes beer and spirits brands to a range of consumers in Kenya and Uganda, and has a 51% equity interest in Serengeti Breweries Limited, Tanzania. Within Africa Regional Markets, Diageo has wholly owned subsidiaries in Cameroon, Ethiopia, Mozambique and Réunion and majority owned subsidiaries in Ghana and the Seychelles. Angola is supplied via a third party distributor. In South Africa, Diageo sells spirits and beer through wholly owned subsidiaries. Diageo also has brewing arrangements with the Castel Group who license, brew and distribute Guinness in the Democratic Republic of Congo, Gambia, Gabon, Ivory Coast, Togo, Benin, Burkina Faso, Chad, Mali and Guinea.
Most of Diageo’s beer volumes are in Africa (68% according to our estimate), but the majority of profits are generated in the UK, Republic of Ireland and the US (63% according to our estimate)
Fig. 20: Diageo –geographical split of the beer business
By volume By revenue By op. profit split UK, RoI, UK, RoI, USA USA UK, RoI, and and USA exports exports and Africa 32% 43% exports 37% 63% Africa Africa 68% 57%
Source: Company Data; Bryan, Garnier & Co ests.
4.2.1. Why Diageo Beer as a target? On the one hand, Diageo has gained some interesting positions in a number of countries (mostly in Africa, including Kenya, Nigeria, Ghana, Uganda, Tanzania) and on the other hand, Diageo does not look like it wants to go full out investing in beer (although it has the cash flow and the opportunities to do so). Indeed, we believe Diageo looks at its emerging market brewing activities mostly as a channel to accelerate distribution of its spirits portfolio. In mature markets, there are few synergies between beer and spirits production/distribution. In some countries like the US, beer cannot be distributed through the same channels as spirits.
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4.2.2. Who would like to own the business? The appeal of Diageo’s beer business is twofold: first it offers access to developing markets from (mostly) eastern Africa, and 2) Guinness as an iconic Irish stout which taps into the craft and premium segments of the global beer market, driven by the Irish diaspora. As such, there is room for Diageo Beer in most portfolios:
Castel might have a go at • Castel has plenty of cash (estimated USD2bn and increasing by USD500-USD750m p.a.) Diageo’s beer business and is looking to further invest in Africa. The company might welcome a more stable cash flow from mature markets.
• Molson Coors could further develop the Guinness brand in Ireland, US and UK. Furthermore, the overlap between the operations in these countries is limited and should not alarm regulators. The African operations would fit less well with Molson Coors, although it might decide to keep these operations. For Diageo, Molson Coors is probably not an interesting buyer at this stage as there is little evidence that the company could be able to handle spirits distribution in Africa.
• AB InBev would be mostly keen to enter additional African markets where it is not present today, while at the same time would be able to add the Guinness brand to its international portfolio and gain significant production, distribution and administrative synergies. It could also strengthen the company’s position in Ireland, the UK and the US and overlaps in Africa (which potentially could face regulatory scrutiny) are limited to Uganda and Tanzania. Both these assets are held through EABL in which Diageo currently owns 50% of the shares. But if AB InBev could get its hands on Castel, then there is nothing except for the Kenyan position that could interest AB InBev.
But Heineken could offer • From Diageo's point of view, Heineken would be the most interesting partner given its presence in a Diageo more cross selling wider number of African countries than Castel and AB InBev (and could introduce Diageo’s spirits opportunities brands to a wider clientele). Also, Heineken could potentially tap a greater pool of synergies as the company is already present in most of these African markets where Diageo also has a foothold. On the other hand, there would also be bigger overlaps, which could pose regulatory hurdles for approval (Ireland and Nigeria). One area where such a problem could occur is Ireland, where a Diageo/Heineken combination could reach a 53% market share. Divesting a series of brands including Smithwicks, Harp, Beamish and Murphy`s (together 7% of the market) could get the company down to a more acceptable 46% share of the market. However, a more radical move could be that Heineken withdraws the Heineken brand from the Irish market (18% market share), which would bring its combined share with Diageo to a more acceptable 38%. This would not necessarily be a bad idea as the Heineken brand is a mainstream brand in Ireland (like Guinness), whereas in most other places it is premium. Heineken did something similar in the UK, moving its brand from mainstream to premium after a period of not being in the market. Another area where there are potential hurdles is Nigeria (divestments could include Harp which has 8% of the market, Goldberg 9%, 33 Export 6%) and if these divestments were picked up by AB InBev, an interesting duopoly situation could occur. Other hurdles might occur in Indonesia, Singapore and Chad, but these are all smaller markets. Nevertheless, the areas of potential regulatory objections add to about a quarter of Diageo’s beer business volumes and with a potential conflict between the Guinness and Heineken brand in Rugby, one could ask if merging the two assets is a worthwhile pursuit. Still we believe that the most likely scenario would be Heineken buying Diageo’s beer business and agreeing to distribute Diageo’s spirits in those markets where it makes sense.
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Fig. 21: Diageo Beer market share in different combinations
Diageo Diageo combined with
AB InBev Heineken Molson Coors Asahi
Kenya 95% 96% 95% 95% 95%
Seychelles 74% 74% 74% 74% 74%
Ghana 47% 98% 47% 47% 47%
Uganda 39% 100% 39% 39% 39%
Liberia 32% 32% 45% 32% 32%
Republic of Ireland 31% 42% 53% 41% 34%
Tanzania 24% 96% 24% 24% 24%
Sierra Leone 21% 21% 60% 21% 21%
Nigeria 20% 30% 87% 20% 20%
Togo 17% 17% 34% 17% 17%
Cameroon 15% 16% 68% 15% 15%
Indonesia 15% 15% 64% 15% 15%
Ethiopia 13% 13% 44% 13% 13%
Mauritius 12% 12% 12% 12% 12%
Gabon 7% 7% 19% 7% 7%
Singapore 6% 12% 57% 6% 10%
Chad 6% 6% 65% 6% 6%
Benin 5% 5% 14% 5% 5%
Mali 5% 5% 16% 5% 5%
United Kingdom 5% 22% 24% 22% 8%
Ivory Coast 4% 4% 5% 4% 4%
Burkina Faso 4% 4% 11% 4% 4%
Gambia 4% 4% 26% 4% 4%
Congo (Brazzaville) 3% 3% 94% 3% 3%
Guinea 2% 2% 2% 2% 2%
Equatorial Guinea 1% 1% 14% 1% 1%
Panama 1% 61% 27% 6% 1%
South Korea 1% 45% 2% 1% 2%
USA 1% 46% 5% 27% 1%
Source: Canadean; Bryan, Garnier & Co ests.
4.2.3. What price? At 20x EBITDA, the value of the beer business (excluding the minorities in Africa, but including the spirits distribution in Africa), is around GBP7.3bn, according to our estimates. We would expect Diageo to put some safeguards in place that the buyer continues to effectively distribute its spirits portfolio and enables it to lead the sales of it.
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5. Americas The Americas is a region that is already strongly consolidated. AB InBev is the clear market leader with a 56% market share across the region with Molson Coors a clear no. two in the North (27% share in North America) while Heineken is the no. two in the South (18% in Latin America). But even then there are plenty of opportunities to consolidate.
An obvious one is Heineken linking up with Molson Coors, but there are also opportunities in both North and Latin America. In North America, some of the bigger craft brewers might want to find a partner before AB InBev, Heineken and Molson Coors have completed their craft portfolio. Yuengling (3.3m hl), Boston Beer (3.1m hl), Sierra Nevada (1.5m hl), New Belgian Brewery (1.5m hl), Craft Brewers Alliance (1m hl) are some of these names.
In Latin America, some of the local heavy weights are still to acquire. That is the case for Polar in Venezuela (82% share), CCU in Chile (68% share), Cerveceria Centroamericana that has a 75% share in Guatemala and Compania Cervecera de Nicaragua that has an 85% share of the Nicaraguan market. But also, the number three in Brazil, Petropolis, might in the end be acquired by Heineken.
Fig. 22: Americas market share
Market shares in North America Market shares in Latin America Heineken Pabst Others Petropolis CCU Others Constel- 4% 2% 14% 5% 2% 7% lation Polar 7% 5%
Molson Heineken Coors AB InBev 18% AB InBev 27% 46% 63%
Source: Canadean; Bryan, Garnier & Co ests. 5.1. Molson Coors a prime target for Heineken? Heineken and Molson Coors All logic should dictate a coming together of Heineken and Molson Coors. Not only would it extend a should merge duopoly with AB InBev across the entire Americas continent, but it could also create significant cross selling opportunities in both North America (Heineken brand) and across the globe (Coors Light, Miller). Furthermore, combining growth opportunities in Latin America with the stable and high cash flows of the North American market are an attraction. The two things holding back an immediate business combination are that Heineken would be unimpressed with Molson Coors' growth profile and especially MillerCoors in the US and Molson Coors family shareholders might be too excited about the value creation generated by the MillerCoors acquisition and start spending their hard-earned cash attempting to create a global brewer.
Molson Coors Brewing Company (Molson Coors) was formed on 9th February 2005, with the merger of Adolph Coors Company and Molson Inc, which were founded in 1873 and 1786, respectively.
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With operating profits of USD1.7bn expected for 2017, the company is the third-largest brewer in the world in terms of profits behind AB Inbev/SABMiller and Heineken. The Molson and Coors family shareholders still own 18% of the capital of the company, but, with different class A and B shareholdings, they control 93% of the A shares, which have most of the voting rights. Shareholders of the mostly widely traded class B shares only have voting rights in certain situations.
Following the SABMiller acquisition by AB InBev, Molson Coors picked up full ownership of the US MillerCoors business (previously owned for 42%). It could have been truly transformational if the company could manage to use the increased purchasing power to boost operating margins and if the increase in financial clout would allow it to further tap international expansion opportunities. However, the company did not want to be involved in purchasing SABMiller’s European assets, hinting that it was seeking to avoid duplication with existing large European players (e.g. Heineken and Carlsberg). The acquisition (for USD12bn) significantly boosted free cash flow from less than USD1bn annually to nearly USD2.0bn.
The company has a portfolio of owned and partner brands, including core brands Carling, Coors Light, Miller Lite, Molson Canadian and Staropramen, as well as craft and speciality beers such as Blue Moon, Creemore Springs, Cobra and Sharp's Doom Bar.
5.1.1. Why Molson Coors as a target? Mature markets free cash flow Molson Coors operates in the US, Canada, the UK & Ireland and in a series of Central European countries (Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia). Furthermore, it has an export business to various other countries (Japan, Mexico, Panama, Germany, Sweden, India, China, and the Caribbean).
Molson Coors’ brewing operations are mainly in mature markets: Canada, the US and the UK. In all three markets, the company takes second position in terms of market share. In Canada, the company has a 37% share of the market behind market leader Labatt (AB InBev) which has 43%; in the US, the company now owns 100% of MillerCoors that has a 27% share behind the market leader AB InBev (46%). And, in the UK, it has an 18% share, which is the same as AB InBev’s and just behind market leader Heineken which has 20%. Brewing businesses in mature markets are highly cash generative as investment needs are limited given the absence of growth (and even decline). Furthermore, they offer stable predictable incomes.
After the full integration of MillerCoors in 2017e, we expect that in terms of revenues, the US is set to be the largest contributor with 68%, followed by Canada 12% and the UK with an estimated 10%. On the basis of operating profit, we expect the US to be good for 73% and Canada for 14%. We estimate that the UK will account for around 8%. Fig. 23: Molson Coors geographic breakdown 2017e
By volume By revenue By operating profit
Canada UK C&E Canada UK C&E Canada UK C&E 7% 9% Europe 7% 10% Europe 7% 8% Europe 9% 10% 5%
US US US 75% 68% 73%
Source: Canadean; Bryan, Garnier & Co ests.
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5.1.2. Who would like to own the business? Heineken and Molson Coors In reality, only Heineken could be the acquirer of the business. If a link-up between Heineken and could create a clear no. 2 in Molson Coors were to happen, the combination would be a clear no. 2 behind AB InBev in the the Americas Americas (from North to South) confirming a duopoly situation in the Americas. That would be good for margins across the continent as both companies tend to aim to build brands rather than discount. However, there is some overlap with the existing European business from Heineken. Operations that might have to be divested account for about 16% of Molson Coors volumes and 12% of its operating profits. This could again be an opportunity for Asahi to bulk up further. Heineken and Molson Coors already work together in different geographic zones. Molson Coors distributes Heineken products in Canada and North America and Heineken sells and distributes Coors Light in Mexico, Ireland, the Bahamas. Furthermore, it was recently announced that the Miller brand will also be distributed by the CCU/Postobon JV in Colombia.
Fig. 24: Market share in the Americas
Molson Coors 11% Heineken Others 12% 21%
AB InBev 56%
Source: Canadean; Bryan, Garnier & Co ests. For AB Inbev, the overlap in the US, Canada and the UK is far too big and the remaining Central & Eastern European business is its previously owned business that it divested when it acquired Anheuser Bush. Both Carlsberg (market cap of USD13bn) and Asahi (market cap of USD17bn) seem to lack the financial clout to approach Molson Coors (market cap of USD21bn without acquisition premium). If Diageo would like to develop a proper beer pillar (and there are no signs that it does), it could still be doing so, and at that moment Molson Coors might interest them.
5.1.3. What price? So, with only one candidate in the running (Heineken) to link up with, the premium for Molson Coors is going to be limited, but that is good news for both Heineken shareholders and the Molson Coors shareholders who would remain shareholders (i.e. the Molson and Coors families). Assuming a 20% premium over the current share price, the Molson and Coors family shareholders would receive a 10% stake in Heineken that potentially could be switched (partially) into a stake in Heineken Holding. That could be very similar to the current structure of Femsa, which has a 20% economic interest in Heineken (consisting of 14.94% of Heineken Holding and 12.53% of Heineken). At a 20% premium (i.e. a share price of USD120), the stock would be trading at 23.7x 2018 earnings and 15.0x EBITDA.
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Fig. 25: Molson Coors market share as a standalone and in combination with other brewers
Molson Coors Molson Coors combined with AB InBev Heineken Carlsberg Diageo
Montenegro 61% 61% 64% 61% 61%
Serbia 36% 38% 39% 58% 36%
Croatia 34% 42% 58% 48% 34%
Canada 31% 79% 34% 31% 31%
Bosnia-Herzegovina 30% 31% 41% 41% 30%
Bulgaria 29% 30% 57% 52% 29%
United States of America 26% 71% 30% 26% 27%
United Kingdom 17% 35% 37% 30% 22%
Czech Republic 16% 16% 27% 16% 16%
Hungary 14% 21% 40% 16% 14%
Romania 13% 15% 42% 19% 13%
Republic of Ireland 9% 20% 31% 18% 41%
Caribbean 6% 45% 20% 6% 6%
Paraguay 6% 76% 18% 6% 6%
Slovak Republic 5% 5% 41% 5% 5%
Macedonia 5% 5% 8% 10% 5%
Panama 4% 64% 31% 4% 6%
Slovenia 3% 3% 6% 4% 3%
Honduras 3% 91% 4% 3% 3%
Mexico 1% 57% 40% 1% 1%
Costa Rica 0% 3% 2% 0% 0%
El Salvador 0% 98% 0% 0% 0%
Source: Canadean; Bryan, Garnier & Co ests.
5.2. Who else in North America? Constellation to remain on The one North American brewer that might be in play at some stage seems to be Boston Beer. its own but some of the craft Indeed, we consider Constellation Brands (which has its own aggressive M&A in both spirits and brewers like Boston Beer beer) and Pabst (too many low-end beers and now moving into cider with the C&C cider distribution might come up for sale deal) as unlikely to find a partner among the bigger brewers. But Boston Beer (4.7m hl of which 3.0m hl beer – 1.3% US market share) might tempt some of the other brewers to seek a deal. Its’ flagship brand, Sam Adams, once the quintessential craft beer, has been losing share as customers have ventured into other craft beers. However, Boston Beer’s portfolio of Sam Adams, Angry Orchard cider, Rebel IPA, Twisted Tea, Coney Island, Concrete Beach Brewery, Traveller and Angel City, does achieve premium pricing at USD194/hl compared to USD134/hl for AB InBev and USD110/hl for Molson Coors. Premium pricing together with distribution synergies might attract US centred brewers like Constellation and Molson Coors, but also Heineken might find its portfolio an interesting proposition. But in the end, we believe that linking up with Molson Coors would make most sense for Boston Beer given distribution and production synergies.
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5.3. Still a lot to happen in Latin America Heineken to acquire the The total Latin American beer market is 332m hl and of that AB InBev has 63% and Heineken 18%. CCU beer business and It is very likely that Heineken will try to increase its share in Latin America and one way to do so is Petropolis. More brewers in convincing some of its existing partners to sell their beer business. The most obvious candidate is Venezuela, the Caribbean, Guatemala and Nicaragua to CCU in which both Heineken and Quiñenco has 30%. Furthermore, Heineken has a 25% stake in be consolidated Costa Rica’s Florida Ice & Farm. Other opportunities for Heineken include Petropolis the no. 3 in Brazil. After acquiring Kirin Brazil, Heineken has a 19% share of the Brazilian market and a full portfolio. Nevertheless, adding the 11% share of Petropolis would generate significant synergies and consolidate the Brazilian market even further. For the rest, there are a couple of independent brewers, with Polar (82% share in Venezuela) and Cisneros (18% share in Venezuela) being the biggest ones and for whom a normalisation of the Venezuelan political and economic environment could be a catalyst. In addition, there are also Union de Bebidas y Licores that has a 23% share in the Caribbean, Cerveceria Centroamericana that has a 75% share in Guatemala and Compania Cervecera de Nicaragua that has an 85% share of the Nicaraguan market (Heineken has already a stake in the company).
Fig. 26: Market concentration Latin America, Fig. 27: The biggest independent Latam 2015 brewers, m hl 2015
100% 20 90% 18 16 80% 14 70% 12 60% 10 8 50% Others 6 40% 4 30% 2 Heineken 0 20% 10% AB InBev
0%
Peru
Chile
Brazil
Bolivia
Mexico
Panama
Ecuador
Uruguay
Colombia
Honduras
Argentina
Nicaragua
Caribbean
CostaRica
Venezuela Guatemala
Source: Canadean; Bryan, Garnier & Co ests.
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6. The Asian markets Consolidation in Asia only at The Asian beer market is the biggest regional beer market accounting for 38% of global beer volumes. the beginning Even excluding China, which on its own is good for 26% of the global beer market, Asia ex. China is the size of the North American or Western European markets. And consolidation in the region is only just starting. In the region, CR Beer (of China) is the biggest brewer accounting for 16% of the regional volumes, followed by AB InBev with 13% and Tsingtao with 11%. Outside China, Kirin, Asahi and AB InBev are the three leading brewers with market shares of 11%, 10% and 10% respectively. With that little degree of concentration, significant deal opportunities lie ahead. Below, we discuss separately the M&A opportunities in China and Japan. Next, we have identified targets in the Philippines, Vietnam, Thailand and Cambodia.
Fig. 28: Asian market shares Market shares Asia Market shares Asia ex China
Heineken San Habeco 3% Miguel 3% ThaiBev Others Kirin Henan 2% 3% 14% 11% Sapporo Asahi Jinxing Others 3% 10% 3% 31% Asahi CR Beer Hite AB 3% 16% 4% InBev 10% Kirin AB InBev Boon 4% 13% Rawd Yanjing 5% 7% UBL Carlsberg Tsingtao 5% Sabeco Heineken Carlsberg San 7% 11% Suntory 6% 6% 7% Miguel 6% 7%
Source: Canadean; Bryan, Garnier & Co ests.
6.1. The Chinese brewers China is the largest beer The Chinese beer market is the largest in the world in terms of volume accounting for 0.5bn hl which market in the world in terms is a quarter of the global beer market. Even in terms of retail value, despite the low pricing, the of volume and the second Chinese beer market is still the second largest in the world, accounting for 11% of the global market, largest in USD behind 15% for the US. It is also a market that still has plenty of room to consolidate. The Top 3 brewers only have 55% of the market, but have come some way over the past 10 years, when they accounted for 34%. The largest brewer is CRB, which owns 24% in volumes. Tsingtao used to be the biggest Chinese brewer but now has only a 17% market share while AB InBev has a 15% share ahead of Yanjing (11%), Carlsberg (6%), Henan Jinxing (4%) and Zhujiang (2%).
Market will need to We see few regulatory hurdles for the market to consolidate further. It is true that when InBev bought consolidate further Anheuser-Busch in 2009, the Chinese regulators (MOFCOM) stipulated that AB InBev could not increase its 27% stake in Tsingtao or its 28.5% holding in Zhujiang Brewery, stating that they needed to prevent the brewer from becoming too dominant. AB InBev sold the 27% stake in Tsingtao but kept its 28.5% stake in Zhujiang Brewery. But times have changed and the Chinese government is increasingly seeking to link its businesses with international players that can help Chinese companies to become more efficient. And one of the signs that this also applies to the brewers is that in July
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2015, MOFCOM approved AB InBev’s increase in its Zhujiang shareholding to 29.99%. Nevertheless, MOFCOM refused to allow ABI to acquire any shareholdings in CR Snow originally held by SABMiller.
CR Beer to become a As such, we believe that consolidation will continue. Already today, CR Beer has a stated objective of national champion? increasing its market share to 30% (from 24%) and aiming to become the largest Chinese brewer, and clearly CR Beer with its Chinese background/shareholders is probably in a good position to achieve this. But AB InBev also hungers for a larger piece of the Chinese market. The same is true for Carlsberg which will want to continue investing into China. Molson Coors currently has a partnership with the Hebei Si’hai Beer Company, but could also be back looking at China once it digests the MillerCoors acquisition. For Heineken, China does not seem to be a priority (for the moment) but undoubtedly will return at some stage. Heineken used to own a majority stake in Kingway, but sold that to CRB and is left with three breweries to produce its own Heineken, Tiger and Anchor brands. The Japanese brewers are not that keen on China and Asahi has made it clear that it wants to sell its 20% stake in Tsingtao. Asahi and Tsingtao never really got on and although Tsingtao needed everything to fight against the growth in premium foreign brands it has never added “Super Dry” to its portfolio.
Heineken best placed to We believe that Heineken is best placed to acquire the 20% stake in Tsingtao. Not only does acquire the 20% in Tsingtao Heineken have no significant stake in China at the moment, but also the premium domestic position that Asahi wants to sell of Tsingtao is something Heineken would like to build on. Indeed, Heineken would be able to help Tsingtao build its brand in the domestic and foreign markets, while its Heineken brand could benefit from the increased Chinese distribution. Moreover, a USD1.3bn purchase price (at the current Tsingtao share price) for the 20% that Asahi holds might be an acceptable entry ticket. However, Heineken will only want to spend the money if there were to be a proper partnership.
Fig. 29: Volume share in Chinese beer market, Fig. 30: Value share in Chinese beer market, 2015 2015
Henan Heineken Henan Jinxing Carlsberg Heineken Yanjing Carlsberg 1% Jinxing 5% 7% Zhujiang 6% 5% Yanjing 1% 10% Zhujiang 2% 9% 2% Others Others Tsingtao 7% Tsingtao 21% 23% 17% AB InBev AB InBev 21% CR Beer 15% CR Beer 23% 25%
Source: Canadean; Bryan, Garnier & Co ests.
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For us the most likely scenario is that: CR Beer remains independent and is allowed to buy Yanjing brewery, thereby creating a Chinese heavyweight with 32% volume share (38% value). (CR Beer used to have SABMiller as a 49% shareholder and Yanjing is looking for a foreign brewer to take a 20% stake).
AB InBev is allowed to buy Zhujiang and also Carlsberg’s Chinese operations, ending with a 24% volume market share (29% value).
Heineken buys Tsingtao and Henan Jinxing allowing it a 23% share of the market (29% value). 6.2. What about the Japanese brewers? Japanese brewers do not like In general, Japanese brewers tend to try to go it alone and their corporate culture is geared towards to link up with foreigners protecting their identity. Even when a company like Sapporo continued to lose market share having low profitability (around 4% operating profit margin), activist hedge fund Steel Partners could not gain support from other shareholders to change management (and in the end sold its 19% stake - 2010). Asahi seems determined to build its own international businesses and has chosen Europe to do so. It has acquired some very decent assets from AB InBev (previous SABMiller assets). However, Europe is a notorious declining market where production and distribution efficiencies are difficult to reach (in contrast to the US).
Suntory is probably also going to remain independent although consolidation opportunities in Spirits (Japanese Whisky, Beam) and soft drinks (e.g. Orangina, Ribena, Lucozade), could encourage it to sell its beer business.
But Kirin is likely to end up The one brewer that we believe might come up for sale is Kirin. The company is currently desperate with AB InBev to continue as an independent brewer and has acquired some interesting positions outside its home market. However, with a 6.8% overall operating margin and continued pressure in Australia (after losing the Corona brand back to AB InBev) and the sale of its lossmaking business in Brazil, one wonders if it were not better to sell itself. The question will become even more urgent if San Miquel's 51% stake was sold to another major and Kirin is left with a 48% share in San Miquel (Philippines).
So, except for a potential sale of Kirin, the majors are very likely to focus on some of the smaller (craft) brewers as the only way to enter the market (Yo-Ho Brewing, Minoh, Kiushi, etc). Fig. 31: Japanese beer market shares by Fig. 32: Latin America market shares by volume 2015 volume 2015
Aeon Orion Craft Sapporo Hite 1% 1% 3% 11% 1% Suntory Others Asahi 15% 19% 36% Heineke n AB Kirin 18% InBev 32% 63%
Source: Canadean; Bryan, Garnier & Co ests.
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Brewers
6.3. Numerous targets in Asia Targets in the Philippines In the Philippines, San Miguel Corporation is a highly attractive target, holding a 90% share in the include San Miguel country as well as a 16% share in Hong Kong and a 29% share in Indonesia. Its total beer production is about 14.7m hl of which 95% in the Philippines. The Philippines is a very attractive beer market with beer consumption still at only 15l per head as it is relatively expensive. It takes an average worker in the Philippines nearly an hour to earn a pint of beer, compared to nine minutes in France and the UK. San Miquel Corporation is 48% owned by Kirin. However, that does not seem to mean that the company would fall immediately into its hand if its owner decided to sell. Indeed, in 2014, Ramon Ang, the billionaire owner of San Miguel, was testing the market for his 51% stake in the company for which he received several bids as high as USD6bn. In fact, we believe that if AB InBev were to place a bid that could not be matched by Kirin, then it would become a target itself.
Privatisation in Vietnam Another great opportunity is the Vietnamese beer market. Just like in the Philippines it takes an average worker nearly an hour to earn a pint of beer, but beer consumption is already at 39l per head. While the world’s largest emerging economies including Russia, Brazil and China are slowing down, Vietnam’s economic growth of over 6% will make it one of the fastest-growing markets in the world. Rising domestic demand and booming foreign direct investment are helping Vietnam to counter global threats and continue to stimulate domestic beer consumption. Beer consumption has been growing at over 11% p.a. over the past 10 years. The government is about to sell off market leader Sabeco (38% market share with 14.6m hl) and the no. 3 Habeco (17% market share with 6.6m hl). These are sizeable brewers, which could be valued at USD4bn and USD1.1bn respectively. For Sabeco, the options are open and all the main brewers have been putting their offers forward. Although we believe AB InBev will be very keen to get Sabeco, we would not underestimate the chances of Heineken. It is true that competition rulings could spoil it for Heineken (allowing max 50% of the beer market), but it has a long standing mutually beneficial partnership with the Vietnamese government. Heineken already has a 5% share in the company. For Habeco, the odds are in favour of Carlsberg, which has a 17% share in the company and a right of first refusal.
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Fig. 33: Vietnamese like their beer Fig. 34: Vietnam volume market share,2015
Others 14% Carlsberg 8% Sabeco 38% Habeco 17% Heineken 23%
Source: South China Morning Post; Canadean; Bryan, Garnier & Co ests. Some of the Thai brewers A third market with still two independent brewers is Thailand. Boon Rawd (Singha) is the largest might open up their capital brewer in Thailand holing a 59% share of the market (11.2m hl) and Thai Beverage Company holds a 33% share of the market (6.3m hl). The Thai beer market is slightly more developed with consumption per head of 27 litres, as consumers need to work about half an hour to earn a pint of beer.
Fig. 35: Recorded alcohol consumption in Fig. 36: Retail price composition of locally litres of pure alcohol produced beers - March 2016 (USD)
100% 3.5 Sales tax 3.0 80% Excise Duty 2.5 Pre-tax price 60% other 2.0 40% wine 1.5 1.0 20% spirits 0.5 beer 0% 0.0
Source: WHO; PWC; Bryan, Garnier & Co ests. * The large others category are beer-like beverages Happoshu (malt content of less than 67%) and daisan-no-biiru (no malt), which have a lower alcohol content and are taxed at a lower rate
ThaiBev was founded by Chinese born Thai billionaire Charoen Sirivadhanabhakdi who gradually expanded from supplying distilleries, to producing alcohol, selling and producing beer (he briefly teamed up with Carlsberg), food, bottling and property. All his five children work in the company and there seems to be an aim to expand internationally. As such, we believe that it is highly unlikely that ThaiBev’s beer business would be up for sale and could actually be one of the independent local consolidators (the company was bidding for APB, AB InBev’s European assets, Vietnam). However,
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in the end, this type of local stronghold could be tempted to sell out to a major. Very similar to ThaiBev, Boon Rawd is using the cash flows from its original beer business (whisky with ThaiBev) to diversify into other sectors including food and property. Piti Bhirom Bhakdi, Managing Director of Boon Rawd and grandchild of the founder stated, "In the beer business, Singha will focus on maintaining profit margins, rather than market share, in order to fund diversification". We see this as a certain willingness to divest the beer business (maybe partially) if it allows for increased funds for other investment opportunities. Currently Boon Rawd has a joint venture with Carlsberg to produce the Carlsberg brand. However, if Boon Rawd were for sale than all the majors would be lining up and probably the highest bidder will win. In the meantime, Heineken has been building its own business in Thailand and has captured a 4% share of the market.
And then there is also The last M&A target that we would like to mention in Asia is the Khmer Brewery, which has a 19% Khmer Brewery in market share in Cambodia with Heineken being a prime candidate for the stake as it could generate a Cambodia. significant amount of synergies given its current 17% share in the market (Carlsberg is market leader with a 53% share and according to our scenario will be acquired by AB InBev).
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Brewers
Price Chart and Rating History
AB InBev
131.0 126.0 Ratings Target Price 121.0 Date Ratings Price Date Target price
116.0 04/01/17 NEUTRAL EUR100.2 14/12/16 EUR107 11/10/16 BUY EUR116.1 01/12/16 EUR109 111.0 05/05/15 NEUTRAL EUR108.8 28/10/16 EUR120
106.0 11/10/16 EUR124 101.0 07/04/16 EUR109 96.0 08/01/16 EUR111
91.0 25/11/15 EUR122 12/11/15 EUR110 86.0 24/09/15 EUR96 81.0 05/05/15 EUR109 18/09/15 18/12/15 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 ANHEUSER-BUSCH INBEV Fair Value Achat Neutre Vente
Carlsberg 700.0 Ratings Target Price 650.0 Date Ratings Price Date Target price 08/02/17 NEUTRAL DKK630.5 28/02/17 DKK645 600.0 04/01/17 SELL DKK612.5 25/11/16 NEUTRAL DKK587 01/12/16 DKK599 550.0 18/08/16 SELL DKK679 11/05/16 DKK600 11/05/16 NEUTRAL DKK638 07/04/16 DKK500 26/02/16 DKK520 500.0 11/01/16 SELL DKK588 05/05/15 NEUTRAL DKK619 11/01/16 DKK485 24/09/15 DKK519 450.0 19/08/15 DKK629 05/05/15 DKK634
400.0 18/09/15 18/12/15 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17
CARLSBERG 'B' Fair Value Achat Neutre Vente
Heineken 90.0 85.0 Ratings Target Price Date Ratings Price Date Target price 80.0 10/02/16 BUY EUR75.18 01/12/16 EUR83 75.0 03/11/15 NEUTRAL EUR82.15 25/11/16 EUR109 05/05/15 BUY EUR69.85 25/11/16 EUR109 70.0 23/08/16 EUR88 65.0 01/08/16 EUR90
60.0 21/04/16 EUR83 07/04/16 EUR79 55.0 10/02/16 EUR83 50.0 05/01/16 EUR80 17/09/14 17/12/14 17/03/15 17/06/15 17/09/15 17/12/15 17/03/16 28/10/15 EUR85 HEINEKEN Fair Value Achat Neutre Vente 24/09/15 EUR75 05/05/15 EUR78
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Brewers
Molson Coors 115.0
110.0 Ratings Target Price Date Ratings Price Date Target price 105.0 25/11/16 NEUTRAL USD98.89 01/12/16 USD107 08/07/16 BUY USD99.85 07/11/16 USD112 100.0 07/04/16 NEUTRAL USD93.99 07/07/16 USD110 95.0 07/04/16 USD97 17/11/15 USD101
90.0
85.0
80.0
75.0 18/09/15 18/12/15 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17
MOLSON COORS BREWING 'B' Fair Value Achat Neutre Vente
Royal Unibrew 340.0 Ratings Target Price 320.0 Date Ratings Price Date Target price 24/11/16 NEUTRAL DKK296.8 300.0 24/11/16 DKK306 13/05/16 BUY DKK290.8 13/05/16 DKK325 280.0
260.0
240.0
220.0 18/09/15 18/12/15 18/03/16 18/06/16 18/09/16 18/12/16 18/03/17 ROYAL UNIBREW Fair Value Achat Neutre Vente
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Brewers
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