Hard work on AB InBev mega deal begins now
Takeover of SABMiller involves major integration challenges
Anheuser-Busch InBev will wake up to the reality of its “Dream Big” mantra on Monday when the Stella Artois brewer’s £79bn takeover of smaller rival SABMiller completes, and the hard graft of delivering the returns promised to shareholders begins.
The combination of the world’s two largest brewers has taken a gruelling 13 months to conclude. The newly enlarged AB InBev begins trading on Tuesday as the world’s fifth-largest consumer products company with annual sales of $55bn, up from $44bn before the takeover.
That makes AB InBev bigger than Coca-Cola but smaller than Nestlé, Procter & Gamble, PepsiCo and Unilever in terms of revenues.
Though AB InBev’s purchase of Britain’s SAB is sizeable — it ranks as the largest takeover of a British company, and the third largest acquisition ever — it is just the latest in a long series of deals by the Belgian brewer over the past 27 years.
These deals have transformed AB InBev from a domestic Brazilian drinks maker once called Brahma into the world’s biggest brewer, now selling one in four beers around the world and taking 45 per cent of the industry’s profits.
In the process, the three Brazilian shareholders who have been the driving force behind this empire building — Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira — have become billionaires.
Analysts say AB InBev can look to SAB’s presence in emerging markets, especially Africa, to provide much needed growth, but caution that integrating the UK company is likely to be more challenging compared with previous takeovers.
Alicia Forry, analyst at Liberum, says: “AB InBev needed this deal. The outlook for AB InBev profit growth [without another takeover] over the medium term is muted as the US remains sluggish, Latin America is slowing and synergies on previous deals are running out.”
AB InBev can point to a successful record of integrating the companies it has bought, and extracting large-scale cost-savings.
This has helped to raise the company’s profit margins to the highest in the industry. At the level of earnings before interest, tax, depreciation and amortisation, the company’s margins have risen from 26 per cent in 2004 to 38.6 per cent last year, according to analysts at Jefferies.
AB InBev’s priority is to slash the debt it has taken on to finance the SAB takeover. Its net debt after completion of the deal will more than double to $100bn, which equates to a hefty 4.5 times ebitda, according to estimates by Liberum analysts. This would be well above the 2 times ebitda that the company says is its optimal capital structure.
Despite the high debt, Moody’s has maintained AB InBev’s investment grade rating, citing the company’s “strong profitability and vast and diverse franchise”.
Over the past decade the company’s total shareholder return has been 492 per cent, outflanked in the brewing and spirits industry only by SAB itself, which has returned 508 per cent, say Bernstein analysts.
SAB is the most complex business AB InBev has bought so far, with operations spread across 70 countries, mostly in emerging markets. AB InBev operates in 26 countries, with just two — Brazil and the US — accounting for almost half its sales.
Its previous targets have tended to be regionally focused, which has made them easier to integrate, such as Anheuser Busch, the Budweiser brewer in the US, and Modelo the Corona brewer in Mexico.
There is also the danger of a culture clash, given AB InBev’s highly centralised approach, which is different from SAB’s more devolved style.
Robert Ottenstein, analyst at Evercore ISI, says this will be a test for AB InBev. “AB InBev fashions itself as a real life school for the development of world-class business managers: executives who can step into any situation, anywhere in the world and drive results,” he says. “Such an approach is seen as transcending cultures and facilitating the integration of diverse businesses.”
Despite the challenges, most analysts and investors expect AB InBev to surpass the $1.4bn of annual savings that it has promised from the SAB takeover in four years, at a one-off cost of $900m.
This $1.4bn target equates to 13 per cent of SAB’s net sales (after taking into account the disposal of SAB assets, including Peroni and Grolsch beers). It is at the lower end of a range of 12 to 21 per cent that AB InBev has achieved in previous deals, say the Jefferies analysts.
As part of the cost-cutting drive, 5,500 jobs will be lost — or 3 per cent of the combined workforce. AB InBev expects 30 per cent of the cost savings to come from shutting overlapping regional offices, 25 per cent from using its increased clout to drive down the price of raw materials and packaging, and the rest, broadly, from higher brewing and distribution efficiencies, and productivity improvements.
However, AB InBev has already acknowledged it will be hard to cut many costs in Africa, a continent where it barely has a presence. It has made job commitments in South Africa to help secure regulatory approval for the SAB takeover.
Yet Africa is the metric against which the success of the takeover is likely to be judged in future. Last year, the world beer market fell in terms of volumes sold by 1 per cent — but Africa grew by 3 per cent, according to Plato Logic, a consultancy.
As Carlos Brito, AB InBev’s chief executive, said in August: “This combination is all about accelerating revenue growth. And one region that will drive much of that growth is Africa.”