Seeing Just the Tip of the Carlsberg--Heard on the Street Chances Look Slim for Finding Good Acquisition Deal
Carlsberg has loaded up its elephant rifle again. That gives investors reason to cringe.
The Danish brewer, set to report third-quarter results Wednesday, said in late October that it would relax a requirement keeping the Carlsberg Foundation's stake in the company above 25%. The move is significant because the foundation, which funds scientific research, could see its 30% holding decline if Carlsberg uses shares as a currency to fund a deal.
While Carlsberg says it doesn't have any "structural changes" planned, it wants to be ready to pounce.
Investors who owned the stock in 2007 may be experiencing déjà vu. Back then, the company issued a similar statement allowing the foundation's stake to fall below 51%.
The company also stressed it had no plans to raise any capital. Yet within a few months, Carlsberg was in hot pursuit of Scottish & Newcastle. And in 2008, Carlsberg raised about $7 billion by issuing new shares to fund the purchase of most of S&N.
That deal has left investors with a pounding headache. Not only did Carlsberg raise its bid three times to get the deal done, the most promising S&N assets have been the most disappointing. Carlsberg wanted the 50% stake it didn't already own in Russian brewer Baltic Beverage Holdings.
But not long after Carlsberg closed the deal, Russia raised taxes on beer and prohibited the sale of the beverage in outdoor kiosks. Sales continue to suffer.
The mess in Russia has left Carlsberg in an unenviable position because most of its other sales are in mature markets like Western Europe that are highly competitive and offer little growth.
Carlsberg's shares have lagged behind major rivals and now trade at 13.2 times forward earnings, compared with 19.2 times for Anheuser-Busch InBev and 19.5 times for SABMiller.
Unfortunately, another deal is unlikely to be a quick fix. Almost any beer company would command a higher price/earnings multiple, so using Carlsberg shares as currency would mean a big hit to earnings.
And it isn't clear that Carlsberg could get its hands on an emerging-market beer company at a reasonable price. Heineken's $4.6 billion purchase of Asia Pacific Breweries in 2012 came at a whopping multiple of 35 times trailing earnings. Even smaller deals like SABMiller's $864 million purchase of Kingway Brewery Holdings in China have drawn crowds of bidders all thirsty for growth.
One possibility would be to team up with Molson Coors Brewing. That would give Carlsberg a foothold in the U.S. where it has only a minimal presence. But the combination remains unlikely because any deal would require that Molson Coors's U.S. joint venture with SABMiller be unwound.
More realistically, Carlsberg should focus on its existing Russian business. That has potential in the long term as drinkers there substitute lager for vodka. While that will take time, it is wiser than risking another big misfire.