Even as the market digests the implications of AB InBev’s decision to sell its Australian business, talk is that assets in South Korea and Central America might be next.
The sale of Australia-based Carlton & United Breweries (CUB) combined with the last-minute decision to pull the Hong Kong IPO seems to have unsettled some investors, though the combined impact has left AB InBev where it wanted to be — with a huge chunk of cash with which to chip away at its colossal $104.2bn debt.
That, and its best quarterly beer sales in more than five years, have helped rekindle market affection for the world’s biggest brewer, formed from the merger with SABMiller in 2016.
The business units that could be under consideration for a sale — South Korea, Guatemala and Honduras — would be attractive to buyers because they have high market shares and generate cash, says analyst Ina Verstl.
Verstl, who co-wrote The Beer Monopoly: How brewers bought and built for world domination, adds: "At the same time they aren’t in high-growth markets, so selling them wouldn’t hurt AB InBev’s growth prospects."
CEO Carlos Brito has already tried to quell speculation that AB InBev will have to sell more assets. "At this time, we have no need [to] since we have a good plan to de-lever and continue to expand the business," he told the FT. "Australia was a very particular case in that the valuation was attractive, and we felt it was fully priced."
Pablo Jimenez, reputation & communications executive at AB InBev, also dismissed the talk as "mere rumour and speculation".
What’s less speculative is AB InBev’s recent performance: top-line sales of 6.2% for the second quarter, margin expansion to 42% and a 9.4% jump in earnings to $5.8bn.
That has helped keep the brewer’s share rally afloat — it has gained 52% since its January slump to R940.
Still, recent asset sales appear to have caught the investment community off-guard.
"Do we take what they’ve done as positive or negative?" asks Jean Pierre Verster, CEO of Protea Capital Management. "The situation speaks to how a very good company can get into trouble when it’s carrying a lot of debt." Verster says AB InBev was forced to scramble, "but it did so very well".
While some reckon the beer giant was a forced seller, the fact is it scored an attractive price for the highly cash-generative Australian business. The $11.3bn paid by Japanese group Asahi is equivalent to an impressive 14.9 times profits (earnings before interest, tax, depreciation and amortisation, or ebitda). Insiders describe the price as "pretty amazing" given that Australia’s beer market has not had any growth for a while and 650 local craft brewers are eating away at the attractive margins at the top end of the market. "Japanese brewers are renowned for paying over the top to clinch a deal, prevent an auction and stop a competitive bid," Verstl wrote in Brauwelt International, a journal that targets executives in the beer and beverage industry. The CUB purchase fits into Asahi’s long-term strategy of extending its global presence.
It’s not the first time Asahi has paid top dollar to AB InBev. In 2015 it agreed to pay 21.5 times ebitda for SABMiller’s European brands. Asahi also bought SABMiller’s Eastern European operations. The price tag on that deal represented a more modest 11.6 times ebitda. Those deals were done even before AB InBev’s $107bn takeover of SABMiller was inked in 2016.
In total, AB InBev has sold $38.6bn of SABMiller assets. In addition to the European businesses, it sold a 58% stake in US-based MillerCoors, China’s Snow Beer and a stake in Coca-Cola Africa’s bottling unit. In the end it turned out AB InBev wasn’t actually buying the second-largest beer group in the world. The sold assets accounted for around 30% of SABMiller’s volumes, pushing it down to around fifth place in the global rankings.
Without those sales AB InBev would now be the group that sells one in every three beers worldwide rather than one in every four.
If it is unable to make a significant dent in the $104bn burden it was shouldering at the end of June it might even struggle to hold onto the "one in four beers" claim.
The proceeds from Asahi will certainly help. There’s little room for more dividend cuts following the 2018 decision to slash dividends in half, and given that the major shareholders (3G Capital, Altria and the Santo Domingo family) will likely be resistant. Management is targeting net debt to ebitda of four times by the end of 2020, down from 4.58 times at end-June. Both figures are way off from what the group describes as its optimal capital structure, which is a net debt to ebitda of around two times. The June results revealed encouraging growth in sales, and more important, prices which, if sustained, will be useful.
The reduction in debt after the SABMiller deal has been a substantially tougher process than what followed InBev’s 2008 purchase of Anheuser-Busch. "Things have not gone to plan this time around," says Verster. That’s mainly because of the economic turmoil that hit its single most important market, Brazil. And things haven’t gone much better in many of its other emerging markets. "They have to deal with dollar-denominated debt and weak emerging market currencies," says Verster.
RECM’s Piet Viljoen agrees the "one in four" beer producer was almost certainly a forced seller of the Australian business because of its "major debt problem". Viljoen, who says AB InBev seems to be doing quite well despite the burden, reckons it was considering the CUB deal concurrently with the Hong Kong IPO. Viljoen believes that being able to do the CUB sale at an attractive price enabled it to pull the Hong Kong listing.
But the official line is that the IPO plan has not been canned. In the just-released results, management says: "We continue to believe in the strategic rationale of a potential offering of a minority stake of Budweiser APAC, excluding Australia, provided that it can be completed at the right valuation." Hong Kong’s retail investors probably won’t be holding their breath.