AB-Inbev: SABMiller Has Wrought Carnage On Its Balance Sheet

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About: Anheuser-Busch InBev SA/NV (BUD)
by: Josh Arnold
Summary

BUD has spent enormously to buy competitors in order to grow.

Those acquisitions, namely SABMiller, were funded almost entirely with debt.

That has left BUD’s balance sheet in a state of disrepair and BUD has essentially mortgaged its future.

This has wide-ranging implications from earnings to the dividend.

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AB-Inbev (NYSE:BUD) has been remaking itself ever since it came into existence several years ago. The company is a serial acquirer and that has led to its balance sheet structure moving around quite a bit over time. That is fine by itself but the way BUD has financed itself has, in my view, mortgaged the future of the company for benefits today. That has very important implications on the company's earnings as well as its ability to finance a dividend going forward. In this article, I'll highlight BUD's reliance upon huge amounts of debt and why it bolsters the case for getting out of BUD while the getting is good.

I'll be using some data I've pulled from Morningstar as well as the company's most recent 20-F.

We'll begin by taking a look at its past five years of long-term debt as well as the interest expense associated with its debt to get an idea of what we're working with.

BUD was sporting roughly $40B in LT debt from 2012 to 2015 with that number rising slightly each year; it was $43.5B in 2015 against $38.8B in 2012. That's a bunch of debt but the increases we saw for that time period were at least manageable. BUD's business is robust and while $40B is a gargantuan amount of money, the $2B to $3B in annual interest expense allowed it to afford to service it.

The very obvious bump in its debt in 2016, however, took its LT debt from $43.5B to a staggering $113.7B in one fell swoop. BUD issued tens of billions of dollars in new debt last year to pay for SABMiller acquisition and given that BUD's financing wasn't in a particularly good spot to begin with, new debt was really the only option. We see the spike on the right side of the chart and while that's a bit ugly on its own, the consequences are many, and none of them are good.

First, enormous amounts of debt come with enormous amounts of interest expense. We can see the spike in interest expense for 2016 over what the prior year produced but also keep in mind that the $4.2B we saw last year wasn't for the full amount for the full year. A huge proportion of BUD's new debt wasn't outstanding for the entire year so that number will undoubtedly be much higher in 2017 and beyond. BUD's complicated web of swaps and other hedging techniques means that forecasting interest expense is difficult. However, one thing I'm sure of is that BUD is going to be on the hook for much more than what it has been in the recent past.

Apart from that, rising rates will negatively impact BUD in two ways. First, about 20% of its debt is in floating rate notes. That means those notes, all else equal, will be more costly to service going forward. But the other thing is that over the next five years, BUD has right at $50B in obligations maturing. Most of that is LT debt (see below from the 20-F) and that means that if rates do indeed rise, BUD will have to refinance that $50B into higher rate notes.

I say BUD will have to refinance with some certainty because there is simply no other way for it to pay its debt down. BUD spends almost all of its FCF on its dividend and that means there is little to nothing left over to finance things like acquisitions or paying down debt. In other words, I'm not sure how BUD would ever actually meaningfully reduce its debt balance; it is going to be $120B+ for a very long time to come. The SABMiller acquisition may work to get BUD's FCF back to the $10B mark - we'll have to wait and see - but for now, BUD's balance sheet is an unmitigated disaster.

This extreme amount of leverage has allowed BUD to remake itself with SABMiller but at what cost? Yes, it is even more dominant in the global beverage industry than it was but it is so highly leveraged at this point that I wouldn't be surprised to see an enormous proportion of its annual EBITDA going to service debt costs. That has consequences for the dividend as well as it is already consuming most of BUD's FCF; what happens when interest expense rises significantly over the $4B+ we saw last year? This isn't a good situation and while I get BUD wanted to grow, I think it has bitten off more than it can chew this time. If you own the stock - for the dividend or the valuation - you should consider what you own because BUD has mortgaged its future for gains today.

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.