By Dimitris Apostolopoulos (University of Warwick) - Date: 10/08/2019
Overview of the deal
Acquirer: Asahi Group Holdings Ltd
Target: AB InBev’s Australian Operations
Estimated value: $11.3B
Announcement date: 19/07/2019
Acquirer Advisors: Rothschild
Target Advisors: Lazard
In 2015, AB InBev acquired SABMiller for $107 billion, creating a colossus that would sell one in every four beers worldwide. The deal saddled AB InBev with massive debts and did not bring the expected returns, resulting into a declining share price. In an attempt to reduce its $106bn debt, AB InBev entered discussions with Morgan Stanley and JPMorgan to list its Asia business, which would render it the world’s biggest IPO in 2019. However, weak investor appetite led the brewer to scrap the plan and instead sell its Australian operations to Japan’s Asahi. The acquisition of AB InBev’s Australian operations, Carlton & United Breweries (CUB), marks Asahi’s biggest overseas acquisition and builds its presence in Australia through CUB’s sales networks, diversifies its revenue streams and includes the rights to sell AB InBev’s global brands such as Budweiser in the country. On the other hand, AB InBev chips away at its debt without putting up for sale a minority stake in its Asian business, which is projected to grow significantly in the coming decade.
“CUB lacks global brands, so the deal is unlikely to lead to expansion in other countries and thus synergies look thin.” -Naomi Takagi, SMBC Securities analyst
Company Details (Asahi Group Holdings Ltd.)
Asahi Group Holdings Ltd is the largest beer and soft drink company in Japan, having a 48.9% market share in the domestic beer market. The company has completed a series of acquisitions in Australia (Schweppes Australia), New Zealand (Vodka Cruiser), Europe (Peroni) and UK (Fuller's Brewery) the last years in an attempt to diversify its core brands.
- Founded in 1889
- CEO: Akiyoshi Koji
- Number of employees: 28,055
- Market Cap: $19.64B -EV: $29,033
- LTM Revenue: $22.94B -LTM EBITDA: $1.94B
- LTM EV/Revenue: 1.27x -LTM EV/EBITDA: 9.05x
Company Details (Anheuser-Busch InBev SA)
Anheuser-Busch InBev SA is a multinational drink and brewing holdings company based in Belgium. It is the world's largest brewer since its formation in 2008 and its acquisition of SABMiller, the world's second-largest brewer and major bottler of Coca-Cola, in 2016 created a brewer behemoth that produces one in every four beers worldwide.
- Founded in 2008
- CEO: Carlos Brito
- Number of employees: 175,000
- Market Cap: $179.29B -EV: $289.56B
- LTM Revenue: $54.08B -LTM EBITDA: $21.14B
- LTM EV/Revenue: 5.35x -LTM EV/EBITDA: 13.70x
Projections and Assumptions
Although Asahi needs to expand away from its shrinking home market, currently 60% of sales, the deal price is high for Carlton & United Breweries (CUB), a high-quality business, with strong margins, but limited prospects for profit growth or improved profitability through cost-cuts. The agreed price of $11.3bn is a multiple of 14.9 times EBITDA and according to JPMorgan’s analyst, Ritsuko Tsunoda, the deal would have been more attractive had the price been about $1.9bn lower. The multiple of 14.9 times EBITDA is significantly higher to AB InBev’s, Heineken’s and Carlsberg’s multiples, which range between 11 and 12.5 times.
On the announcement date, Asahi’s shares closed 8.9% down, marking their biggest single-day fall since the aftermath of the 2011 earthquake and tsunami, as Moody’s said it was placing Asahi’s credit rating under review for possible downgrade. For the Japanese group, this acquisition marked the most aggressive and expensive move yet in its pursuit for overseas growth as it looks to reduce its reliance on the Japanese beer market. However, after spending more than $11bn over the past three years to acquire Urquell, Peroni and other brands from AB InBev, the company is already saddled with an interest-bearing debt of $10bn. The deal will increase its Debt-to-EBITDA above 4 times, which indicates that the business will be highly leveraged, and explains why Moody’s put its rating on review. On top of fresh debt concerns, Japan’s largest brewer will issue up to $1.9bn in new equity to finance the acquisition, which will result in an 8.7 per cent dilution of current shares. In addition, AB InBev’s cost-cutting practice does not allow Asahi to cut costs further but rather requires saving from joint procurement and using CUB sales channels to sell other brands.
Regarding AB InBev, investors celebrated the offloading of the Australian business by marking up the shares 6 per cent on the same day and 13 per cent 10 days later. The deal will help the world’s largest brewer to chip away at its debt and reduce its Debt-to-EBITDA multiple from 4.6x to 4.0x by the end of next year. Additionally, Carlos Brito, AB InBev’s CEO, said that the company would keep the option of listing its Asian business, which would be easier to float after the divestiture. “We could consider it again, but there is no commitment or decision to do so,” he said. “The rationale is intact, namely to create a local champion” that could be a platform for future deals in the region.
“Selling Carlton & United Breweries to Asahi for about $11.3 billion sheds a low-growth, high-margin asset, and allows for reinvestment into better growth markets.” - Duncan Fox, Bloomberg analyst
Long Term Upsides
Acquiring CUB will help Asahi build its presence in Australia, where it has already completed five acquisitions in the non-alcoholic segment since 2009. The business was attractive considering CUB’s dominant position in the Australian market and its strong operating margins of 43 per cent. Moreover, this is an opportunity for Asahi to diversify its portfolio. Both the European and Australian businesses generate more than $1 billion of annual EBITDA and combined, they roughly match the size of Asahi’s Japanese business. Although Australia's beer market is not growing, it is high-margin, stable and dilutes Asahi’s exposure to a home market where an ageing and shrinking population creates an intensifying challenge.
In addition, Australia’s demand for premium beer is rising which is key for Asahi’s success. The Japanese brewer has decided to pursue quality over quantity and focus on the premium market, which is indicated by its recent high-profile acquisitions. During 2016 and 2017, the Japanese company acquired multiple high-shelf European brands, such as Peroni, for a total of around $11 billion, while this year Asahi acquired the premium beer business from British brewer Fuller, Smith & Turner for $312 million. According to analysts, there is a new trend of people trading up to more expensive beers, which will benefit Asahi the following years.
The lack of growth in Japan in combination with access to cheap funding within their domestic system has led a range of Japan’s larger companies to expand internationally, paying high prices to diversify their revenue streams. At 14.9 times CUB’s EBITDA last year, Asahi is paying a high price but at least, this deal offers a rare opportunity to expand in scale. CUB controls a nearly 50% share in an unusual market, a developed nation that is growing in population, and possesses strong sales channels with a heavy penetration among restaurants, which will be of great benefit to Asahi. Lastly, CUB's stable and high operating margin business will help Asahi reduce its debt level in the long term and return to its current 3x Debt-to-EBITDA ratio by 2022.
“The divestiture of CUB, once completed, will help AB InBev to accelerate its expansion into other fast-growing markets in the Asia-Pacific region and globally,” the company said. By selling CUB, AB InBev removes a slow-growing part of its Asia-Pacific operations, potentially making any future IPO more attractive to investors who were not previously persuaded with the previous deal’s valuation. A listing would be used as a vehicle to acquire regional rivals in the future and position AB InBev better in Asia and particularly China, which will be beer’s fastest-growing region in the coming decade. Therefore, AB InBev is well-positioned for further expansion in Asia without selling a minority stake yet as the divestiture brought back financial flexibility in case acquisition targets emerge.
Risks and Uncertainties
Although the deal is unlikely to be rejected by regulators, Asahi might need to dispose of AB InBev brands it would have commercial rights in Australia. According to Bernstein Research, Corona, Becks, Stella Artois and Budweiser together have a 53% of the super-premium market segment, which also comprises Asahi’s 7% share and 18% of CUB’s overall volume. Bernstein analysts point out that Asahi could afford to lose all the AB InBev brands but Corona. Corona is by far the most valuable brand both strategically and financially as it sells almost 1 million hectoliters in Australia, has a 35% share of the super-premium segment and is a must-stock brand for trade retailers. Asahi should also be concerned about Australians, who increasingly fail to live up to the stereotype of avid beer drinkers. Their consumption has declined from 500 bottles per person a year in 1975 to 224 in 2017. However, Asahi expects immigration to offset falling beer consumption and retain its current profit margins. Furthermore, Asahi is facing fierce domestic competition by Kirin Brewery, which trailed in volume sales by only a 1.5 percentage-point share during the first six months of 2019 and with which Asahi will have to compete for the Japanese market share.
The main risk that AB InBev is facing in the near future is its exposure to emerging markets. Since 2016, AB InBev is estimated to have lost around $2.3bn due to adverse foreign exchange. With the exit from Australia, emerging markets are even more important to AB InBev’s fortunes and will hold the key to whether the world’s largest brewer lives up to its name.
Lastly, both companies should be concerned about beer’s declining share of the total alcohol market in regions like the US, where it has been declining since 2000, while spirits and wine have been gaining ground. The trend towards health consciousness among consumers has also caused Japan's beer market to shrink for 14 consecutive years through 2018, causing headache to both companies.
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