AB InBev's New Gold Mine

| About: Anheuser-Busch Inbev (BUD)

Summary

AB InBev is selling it stake in Distill Group to speed up regulatory approval for its SABMiller acquisition.

The most exciting part of the acquisition is the exposure it gives InBev to the growing beer market in Africa.

Expanding in Africa brings its risks, but sales are projected to grow 7-10% annually, helping to offset saturation in developed markets.

Anheuser-Busch Inbev (NYSE:BUD) has agreed to sell SABMiller's stake in Distill Group (a brewing company based in South Africa) faster than expected in order to expedite regulatory approval for its SABMiller acquisition. BUD's acquisition of SAB will be the biggest beer deal history, and give Inbev more than 50% of the global beer market. Arguably the most enticing aspect of the deal is the exposure it will give BUD to the growing beer market in Africa. According to Morningstar, the "access to Africa is the crown jewel in the deal". While there are substantial risks related to an expansion in Africa, the potential rewards outnumber them. We project beer revenues in Africa will grow between 7-10% annually over the next five years, helping BUD offset declines in certain categories in developed markets.

Attractive Demographics

BUD's strategy has been to acquire brands with strong growth potential, expand distribution infrastructure, and cut costs. With growth slowing in the western world, the company has increasingly turned to emerging markets. It may have found a gold mine in Africa. The continent's potential beer market is massive. According to the UN, Africa will account for one-fifth of the global population by 2025. Africa has the largest working age population in the world. According to BBC, three fifths of the population is under the age of 25. The ideal age demographic for beer consumption (between 15 and 45) will therefore comprise a large (and growing) percentage of the Africa's population over the next ten years. Incomes remain low but urbanization and job creation in many regions are causing a shift towards premium beers. Consumers now display more of a preference for brand than they used to, which benefits BUD's portfolio of world-renowned labels. According to McKinsey, consumer industries in Africa will grow by $400 billion by 2020.

Risks

Expanding in Africa brings significant risks. Poor infrastructure and a lack of distribution networks will weigh on productivity and increase costs. One of the keys to BUD's success has been the firm's ability to leverage local scale and streamlined distribution systems to achieve insurmountable cost advantages over smaller rivals. This will be more difficult in Africa. There are no large-scale grocers, but rather a bunch of independent convenience stores. Beer is also less popular in Africa than it is elsewhere. According to Global Risk Insights, per capita beer consumption in Africa is just 9 liters per year, compared to a global average of 44. Africans still prefer wines and liquor to beer. However, we believe this last point strengthens the case for investing in Africa. Consumer tastes can be fickle, and low beer penetration levels create the potential for more growth.

Conclusion

An expansion into Africa is certainly not devoid of risk, but BUD's willingness to speed up regulatory proceedings with the sale of Distill Group is a testament to the value it places on Africa's beer market. Low commodity prices, weak currencies, and the potential for capital flight if the Fed raises rates are mainly short-term headwinds. Africa's attractive demographics will transform the fortunes of its consumer industries over time, and help BUD offset declines in saturated markets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.