November 27, 2015    4 minute read

The Debt Strained Megabrewer

   November 27, 2015    4 minute read

The Debt Strained Megabrewer

The world’s largest brewer Anheuser-Busch InBev is plunging deeper into debt, with its current debt at a level of $51.5bn and debt-to-profits before debt and tax ratio of 2.87. The recent megamerger deal with rival brewer SABMiller will add even more of a burden upon AB InBev’s shoulders. Apart from its internal financial resources, AB InBev obtained $75bn of loans in order to close the $107bn deal. The sale of SABMiller’s stake in MillerCoors and global Miller Brand helped AB InBev raise $12bn. This fund will be used to pay down and cancel the disposals bridge facilities ($10bn),and thereafter the bridge to cash, according to the investor presentation on the AB InBev website.

Felipe Dutra, AB InBev’s chief financial officer, stated in a conference call that the company will replace bank loans with bonds as soon as is practically possible. The equivalent of $55bn bonds is expected to be sold across multiple currencies and maturities, according to a Bloomberg interview, with this amount of bonds breaking the record of the $49bn of bonds issued by Verizon Communications two years ago to fund its takeover of Vodafone Group, via a corporate merger and acquisition financing.

This new debt will drive AB InBev’s net debt to 4.5 times profits before tax, compared to the level of 2.5 times at the end of the second quarter, according to an analyst from Trevor Stirling. High debt is not always problematic, providing that the company is able to pay it off. In 2014, AB InBev’s free cash flow decreased 3.1% to $9.68bn; while SABMiller generated a 18.27% growth. Both AB InBev and SABMiller have projected some annual cost savings, but it’s hardly made a significant difference on balance sheet. The market favors the megamerger deal, with the price to earnings ratio of SABMiller rising from 21.76x to 29.63x in two months after AB InBev revealed the acquisition indication, which is much higher than its peer brewer Heineken 24.13x, Diageo (20.10x), and even ABInBev (21.55x).

The new combined group is expected to produce one third of the beer in the world and AB InBev anticipated that annual revenue will reach around $64bn (AB InBev’s $47.1bn plus SABMiller’s $16.5bn), which would make them the fifth largest consumer goods company, behind Nestle, P&G, Pepsico and Unilever. In terms of earnings before interest, taxes, depreciation and amortization, the mega-brewer is expected to rank number one.

As the biggest beer producer, AB InBev has the dominant market share in three of the top ten beer markets in the world: USA, Brazil and Mexico. Associating with SABMiller, the combined group will take the leading position in China and Poland, resulting in half of the top beer markets being dominated by the new beer giant. SABMiller’s advantages in the emerging markets, in particular in Africa, Asia and Latin America, are incomparably attractive in current industry trends. AB InBev’s interest in SABMiller originated from the rising popularity of locally-produced food and beverages catering to regional tastes and values, coinciding with the need for AB InBev to expand its geographic presence in fast-growing regions to offset sluggish industry growth in developed markets, according to Bloomberg analysts Kenneth Shea and Duncan Fox.

Whilst based in London, SABMiller’s origins date back to the foundation of South African Breweries in 1895, which gives the brewer an iconic South African brand. 33% of SABMiller’s revenue in 2014 is generated from Africa, where the beer market has been expanding rapidly compared to other parts of world over the past five years. The combined group has taken Africa as a critical driver for the future growth of the business, as it’s forecasts that Africa’s beer volumes will grow at almost 3 times as the global rate in the following 10 years.

Currently, 90% of African beer markets are dominated by SABMiller, Heineken, Castel and Diageo. The monopoly is being challenged by new and emerging local brands, whilst premium brands have also been witnessing a significant growth, said analysts at Canadean.

SABMiller’s heritage in African market is highly valued by AB InBev and although its market share is geographically unbalanced across the continent, SABMiller’s effort in investing into local brands is seen as providing long-term economic benefits by AB InBev. According to Financial Times article, the new combined group would try to introduce premium brands to Africa.
SABMiller’s recent annualized return on invested capital is 8.27%, which exceeds its weighted average cost of capital (7.33%). Overall the value of the brewer is expected to increase, as the returns on investment are higher than the costs. AB InBev is expected to adjust its financial structure after digesting SABMiller’s assets, in order to further reduce the cost of capital.

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