Anheuser-Busch InBev: Love The Beer Giant
Summary
- There's a possibility of higher synergies from AB InBev's acquisition of the world's second larger brewer SABMiller.
- AB InBev has a massive presence across the world, that continues to grow with 59% of revenue coming from emerging markets.
- AB InBev is diversified in terms of price and taste, with its High End unit leading the way with both revenue and EBITDA growth.
- AB InBev is financially much stronger than its peers, with operating margin double of its peers and EBITDA margin highest of major consumer goods companies.
- Massive debt load is not a concern.
Forgive me, Father, for I have sinned... again. I invested in a sin company, specifically alcohol.
Earlier this year, I invested in a tobacco company and will continue to hold it. This time, I'm investing in another recession-proof company. And this time, I'm investing in a company I'm a consumer of, frequently.
I'm like the 0.00000000000001% of the consumers that use the products of Anheuser-Busch InBev (NYSE: BUD). The company has consumers all around the world, both in developed markets and emerging markets. In addition to their strong global presence, they have a portfolio of over 500 brands with different flavors and price points. With that all, AB InBev has over $100 billion of debt, which is not of a concern.
* = I'm using my mental model of weighted criteria to make this investment decision (don't laugh). The weights show the relative importance of what made me invest. For example, a weight of 25% was a strong reason I invested in the company compared to a 12.5% weight, which was not as much as strong. The mental model changed recently. From now on, I won't be 100% convinced on new investment decisions.
Cost Synergies (*12.5% weight)
After the world's largest brewer company AB InBev acquired the second largest brewer SABMiller for $100 billion in 2016, AB InBev became the 7th largest consumer goods company. The combined company sells a quarter of all beers in the world.
Global Market Share of Beer Companies, 2016. Market share based on Volume Sales
AB InBev sells 3x times as many beers than the second largest beer brewer Heineken (OTCQX:HEINY). Such strong distribution will allow the mega-brewer to have a bargaining power over suppliers. The company expects the merger to result in $3.2 billion cost synergies, mainly from procurement and operating expenses. Procurement lowers cost of ownership by buying goods for less and allowing the organization to operate more efficiently. According to Accenture, supply chain synergies may constitute 30-50% of merger-related increases in shareholder value.
The $3.2 billion cost synergies were increased multiple times from the initial target of $1.4 billion. $2.5 billion cost savings have already been captured to date, with $1 billion coming from SAB. The cost synergies do not include working capital synergies.
Big deals can deliver big savings Source: Financial Times
Past acquisitions by SABMiller, InBev, and AB resulted in cost synergies. The $3.2 billion cost synergy target is 6% of the 2017 sales, below the comparables above. It is possible higher synergies can be achieved. After all, the AB InBev management in FY2017 said, "Cost synergies are not only greater than originally expected, but they are also being delivered at a faster pace."
Geographic Expansion (*25% weight)
Not only will the third-largest acquisition in history bring cost synergies, but will allow the mega-brewer to expand into more geographic markets, especially Africa where it is the only region in the world where consumption per capita has grown over the past 15 years.
AB InBev/SAB Miller will dominate the Americas Source: Financial Times
Global per capita beer consumption ranges from 0 to 100 (excluding Czech Republic 149 liters, Austria 108 liters, Germany 106 liters, and Estonia 102 liters). The developed market countries are saturated, with beer consumption per capita above 65 liters, U.S. at 77 liters and Poland at 99 liters. Developed countries have little room for growth. North America region is expected to grow at 4.7% on a CAGR basis from 2018 to 2023.
The alcohol industry has looked at emerging and developing countries as new sources of growth.
Beer consumption per capita by country Source: ChartsBin.com
Such regions with a room to grow are Africa and Asia, with per capita beer consumption at 32 liters in China and 40 liters in Namibia. In the next five years, the Asia-Pacific region is expected to grow at 9.7% on a CAGR basis, double the growth rate of North America.
Not only does Asia-Pacific will grow more than North America, the region has the number one market share of the global beer market at 36%, 2.6x more than the U.S. at 14%.
Most of the Asia-Pacific's market share goes to China accounting for 27% market of the global market, followed by Japan at 3%.
In December 2017, AB InBev opened Asia's largest brewery in east China, with a capacity of 1.5 million tons of beer a year. In the first half of fiscal 2018, revenue in China grew 6% and volume grew 2.4%. AB InBev has achieved this growth by focusing on the premium market. In the second quarter, China delivered one of the best volume and share performances in the last three years. In the first half of the year, EBITDA grew 6.2% and the margin grew 0.82% to 35.5%.
In China, AB InBev has the third-largest market share, followed by two Chinese brewers.
Chinese Market Share of Beer Companies, 2017. Market share based on volume sales. Source: Euromonitor While there's still a room for growth in China, competition continues to intensify. Heineken is buying a 40% stake in China's top brewer China Resources.
In the U.S., on the other hand, AB InBev is a market leader. Top five brewers control 81% of the market. In 2007, they used to control 90%. The decline is due to increased competition from smaller brewers. From 2007 to 2017, the number of U.S. breweries increased a whopping 322% to 6,372. And 98% of them are craft breweries.
U.S. Market Share of Brewers - 2007/2017 Source: Beer Marketer's Insights, 2018
Of the top ten beer brands in the U.S., AB InBev owns six of them. The other four of them are owned by Molson Coors (NYSE: TAP). Looks like I'm going to buy more of AB InBev's brands and less of the competitors.
Market Share of Beer Brands in the U.S., 2017 Source: Statista
Similar to the U.S, Europe has a little room for growth. The second largest market with a 27% share is expected to increase at a 4.3% CAGR from 2018 to 2023.
Note: I was unable to find the market share information for vendors in Europe. The above 27% Europe beer market share number and the 4.3% CAGR growth number are from Mordon Intelligence. The numbers include the 5th largest beer volume country Russia which accounts for 5% of the world's beer volume. According to Mordon Intelligence, Russia is "largest consumer of beer in Europe, followed by Germany, the United Kingdom, Spain, Italy, Poland, and France." The statement confirms the market share data by countries from source Brewers of Europe. I also couldn't find the vendors' market share info for individual European countries.
Europe Beer Market Share by Country, 2016 - Based on Beer Consumption Source: Brewers of Europe
Germany is the largest consumer of beer in Europe with 23% market share, followed by United Kingdom (12%), Spain/Poland (10%), France (6%) and Italy/Russia (5%).
In 2015, Europe accounted for 9.2% of Former AB InBev's total revenue and SABMiller's revenue from Europe was 16.7%. As part of the acquisition, AB InBev had to divest a lot of SABMiller's interests in Europe, China, and the U.S. In return, they raised one-fourth of the money it paid to acquire SABMiller.
If I had to estimate, AB InBev has at least 25% of Europe's market share by volume sales. In the fiscal year of 2017, 18% of AB InBev's revenue came from EMEA (Europe, Middle East, Africa).
AB InBev Revenue % by Region Latin America West: Colombia, Ecuador, El Salvador, Honduras, Mexico, and Peru. Latin America North: Brazil, the Dominican Republic, Guatemala, Panama, St. Vincent, Cuba, Puerto Rico, Barbados, Dominica and the Caribbean. Latin America South: Argentina, Uruguay, Chile, Paraguay and Bolivia.
Within three years, AB InBev reduced their portfolio exposure to saturated North America market by 8% as a percentage of sales. To make up for it, they have increased their exposure to Latin America West and Africa.
Latin America West exposure increased from 9.4% to 16.4%, which is a great news since they have the largest EBITDA margin in the region from the rest of the regions.
AB InBev's Normalized EBITDA Margin by Region, 2017
Former AB InBev barely had any foothold in Africa. Africa has one of the lowest beer consumption per capita and is one of the regions that's witnessing significant growth rates of beer consumption.
Since 1999, Africa is the fastest growing beer market in the world. According to Plato Logic Limited, Africa beer volume is expected to grow at nearly three times the rate of global beer volumes between 2014 and 2025.
Beer Market Growth by Region, CAGR 1999 - 2017, % Source: GlobalData
In March 2018, AB InBev agreed to build a $100 million brewery in East Africa. The project is expected to start production in the second half of 2020 and will have an initial capacity of 100,000 tons of beer a year. This month, the brewer announced plans to build 200,000 tons capacity brewer in SouthEast starting the second half of 2019.
In 2016, Africa accounted for 7.2% of the world's beer consumption.
2016 Global Market Share of Beer Consumption by Region Source: Kirin Beer University
The alcohol industry is looking to offset slowing growth in developed countries by investing in emerging countries. Regions such as Asia and Africa are expected to see an increase in the middle class, millennials population, easing of alcohol regulations, and more cultural acceptance of alcohol consumption. AB InBev is well positioned to benefit, with 59% of revenue coming from emerging markets.
Premiumization (*22.5% weight)
There's a shift in consumer preferences. Millennials who are more likely to spend money are going towards high-end and craft beers. Companies who are able to adapt by introducing premium alcohol and also able to afford cheaper brands during the economic crisis are more likely to stand out.
Global Beer Growth by Price Segment, CAGR 1999 - 2017 Source: GlobalData
Over the past 18 years, premium brands have grown much faster than the average beers. Not only is AB InBev diversified geographically, but also in price and taste.
AB InBev's High End Company is a business unit made of specialty and craft brands in 22 markets. The high-end brands tend to higher margins. The High End unit "continues to lead the way with both revenue and EBITDA growing by more than 20% in HY18.", according to management comments on the second quarter earnings report. With that being said, the intensity of competitive pressure in premium segments of beers should not be a concern to this company as the distinguished management is aware of the premiumization trend and will continue to adapt.
Such High End brands are Goose Island, Michelob Ultra, and Stella Artois. AB InBev has been aggressively marketing its Goose Island to millennials in China's urban centers. Michelob Ultra marked its thirteenth consecutive quarter as the larger share gainer in the U.S. Stella Artois had 13% growth in 2017, driven by Argentina, U.S. and Brazil. Stella was the most expensive brand relatively in 2013 (the latest date I could find).
Stella Artois, 2007-2013 growth, and off-premise price
Source: Welcome to the High End 2013 Investor Presentation
Relative Financials (*15% weight)
AB InBev is strong financially compared to its global peers. Their operating margin is twice as much as its peers. For all of them, the margins are stable.
Operating Margin, 2008-2017. AB InBev vs. peers Source: Morningstar
Free Cash Flow margin, on the other hand, fluctuates more. Most of the years, AB InBev's FCF margin is higher than its peers.
Free Cash Flow Margin, 2008-2017. AB InBev vs. peers Source: Morningstar
Organic revenue growth is the highest of major consumer goods companies.
5-Year CAGR Organic Revenue Growth, Consumer Goods Companies
EBITDA margin is also the highest of major consumer goods companies.
Leverage High, No Worries (*15% weight)
When it comes to leverage, AB InBev is an outlier especially since they took out record amounts of loans to fund the acquisition. This is the company's biggest risk at this time, but that should not be a concern. At the end of 2017, total debt stood at $116 billion. After including assets such as cash, net debt stands at $104.4 billion. With AB InBev's EBITDA standing at $21.4 billion, its net-debt/EBITDA leverage is 4.9x. The company's goal is to deleverage net-debt/EBITDA ratio to around 2x.
Investors are mainly worried about its debt load and have pushed down BUD's share-price by 23% since 2016. I as an investor, however, am not worried about AB InBev's balance sheet for multiple reasons.
AB InBev has a strong operating cash flow of about $15 billion annually, enough to pay its debt that's due each year. Maturities are well distributed over the years.
AB InBev Debt Maturity Profile Source: 2017 Annual Presentation
Interest expense is around four billion dollars a year. That's expected to decrease as the debt burden decreases. Keep in mind, the cash flow from operations includes the interest payments.
6.6% of the debt is floating and the rest are fixed-rate. I believe the management will pay off floating debt first, especially since interest rates are rising in the U.S. 58% of its debt is denominated in greenbacks. In 2017, the company paid off the highest floating debt, term facility B of $10 billion (LIBOR + 1.25%). They also paid off 1-year bridge loan of $10 billion (LIBOR + 1%).
As you can see above in the picture of debt maturity profile, they stated they would pay off the $2.5 billion 7.75% note due in January 2019. They did exactly that, with cash, in March. Also with cash, they paid off some notes of a total $7.8 billion due in 2019 and 2020.
They could also refinance the debt and push back the average duration of the debt. They could also raise debt to pay off debt, especially since the brewer giant has similar or better ratings than its peers. They could also divest some assets, especially in saturated markets.
In addition to a strong cash flow with a manageable debt maturity profile, AB InBev's EBITDA is likely to grow over the coming years. From 2010 to 2016, average revenue growth was 3.3% (excluding 2009 and 2017 outliers of 56% and 24%, respectively). Let's say in the worst case scenario, revenue grew by 3% until 2020. In 2020, revenue would be $61.7 billion.
From 2008-2017, the average EBITDA margin was 39.2%. Let's say the 39.2% is the EBITDA margin until 2020 in the worst-case scenario since it's expected to increase as the company realizes cost synergies. In 2020, EBITDA would be $24.9 billion, which grew by 3% each year in 2018-2020. Historically from 2010 to 2016, the average EBITDA growth was 3.8%. EBITDA growth is also the worst-case scenario.
And let's say the net-debt burden is $90 billion in 2020. That means the net-debt/EBITDA ratio will be 3.6x. That ratio is in the base case scenario, in my opinion. I believe the ratio will most likely be 2x before 2028. It is possible management will lower it faster than expected. Why? Because they did it before.
When InBev acquired AB for $52 billion in 2008, they did so with $45 billion in debt. The net-debt/EBITDA leverage shot up from 1.0x to 7.8x. Within two years (2010), it was 2.9x. Within three years, it was 2.3x. Within four years, it was 1.94x. Amazing right? No, not so amazing.
The company cut its dividend by 88.5% to 0.28 euros in 2008 from 2.44 euros in 2007. It was actually less than 88% cut, but more than 61% cut since the dividend was 0.72 euros in 2006.
After 2008, AB InBev steadily increased its dividends until 2015. Since 2015, the dividend has stayed the same. Currently, BUD is yielding 4.5%. I don't believe we will see a cut in dividend unless the financials deteriorates significantly or the company makes another big acquisition which is highly unlikely at this time. While the SABMiller acquisition is twice as much than in AB's acquisition, their leverage is little lower than in 2008. So it is possible the management will lower the ratio faster than expectations while keeping dividend consistent.
We shouldn't worry much about any potential recession. During an economic crisis, alcohol sales tend to remain stable or even increase. In 2009, AB InBev's organic revenue growth was 2.5% and 4.4% in 2010. Keep in mind, business operations and share-price are a different story during volatility in the markets.
Risks (*-5% weight)
There are some threats to the beer sector. For AB InBev, the risks are limited due to its size and power. I don't see any risks as a major concern at this time. Therefore, I will make this brief. Feel free to ask questions in the comments below and I would be happy to answer them.
As stated above, the increase in competitive pressure in the premium segments is not a concern as AB InBev's distinguished management is aware of the premiumization trend and will continue to adapt.
The increasing competition from craft brewers, especially in developed markets, is not a concern as AB InBev actively has bought up a number of smaller players in addition to their own in-house innovation.
To add to the premiumization trend, consumer preferences are also shifting towards harder drinks wine and spirits. Last year, beer's share of the U.S. alcohol markets dropped to 45.6%, 2.6% decline since 2010. The U.S. Budweiser sales fell 17% from 2010 through 2016. During the same period, Bud Light sales were down 14%. I believe this is a major risk in the long run.
Who knows, maybe, AB InBev will go into spirits/wine sector. To offset the losses from younger generation preferences of alcohol, AB InBev is trying to expand into emerging markets and higher-priced beers. For example, global Budweiser volumes have grown every year since 2010, with 69% of the volume coming outside the U.S.
Share of total U.S alcohol market Source: Wall Street Journal
Tariffs by the U.S. on steel and aluminum imports and the retaliatory tariffs should increase the costs for the alcohol industry. Half of AB InBev's domestic beers sales are canned or bottled in aluminum. The demand could be negatively impacted in the medium and longer-run. Companies may have to cut back on investments and new hires. The losses can be partly mitigated by increased beer prices.
Great news for large multinational alcohol sellers is that smaller players will be hurt the most as the big players are better able to hedge their costs. I'm not worried about tariffs' impact on AB InBev for three reasons. First, the company will be able to offset some costs by raising the product prices. Second, it's a political decision which I believe won't last after a new administration in 2021 or 2025. By "won't last," I mean the tariffs. Third, the spirits sector will be exposed to earnings pressure more than the beer sector.
Conclusion
I believe BUD is a strong long-term buy. The debt load for a strategic acquisition mainly has scared away some investors. Irrational behaviors can be your opportunities.
Over time, I'm confident the balance sheet leverage will gradually decrease, revenue will grow, and EBITDA will expand. I'm confident not because it's a great company, but AB InBev's management has proven themselves. The major risk to be aware of in the long run is the declining share of the beer sector, especially in developed countries.
After taking in the positives and negatives, I'm 95% (weighted criteria) convinced on BUD's share price returning capital appreciation within five years. I do not have a share price target, but I believe there will be a significant capital appreciation, with dividends being reinvested back into BUD. On August 13th Monday, I bought shares of BUD.
With that being said, I will be buying more of AB InBev's brands and less of its peers. I suggest you do the same, but it's up to you. Your life. Your finances. Your choices.
Author's note: If you have any questions/comments/suggestions, feel free to contact me personally and/or leave a comment below. Thank you for reading. Don't forget to subscribe.
This article was written by
Analyst’s Disclosure: I am/we are long BUD. 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.
All the data comes from investor relations website, Morningstar, Financial Times, and few websites which are linked in the article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (15)
that's because worldwide, drinkers want a small taste of America...
never want to do anything that might kill that dream. Be like sending the Clydesdales to the glue factory... bad idea.
