Anheuser-Busch InBev’s debt reduction plans are no small beer
Sales of American beers fell sharply during Anheuser-Busch InBev (NYSE: BUD) during the last years. Not one to quietly cry into its beer during the recession, the brewing giant is aiming to pay off its debt and rejuvenate its business by selling its Australian subsidiary to the Japanese. Asahi Holdings Group (OTC: ASBRF) for the modest sum of 11.3 billion dollars. But recently the sale has clashed with Australian regulators, raising doubts whether the deal will give AB InBev a tasty new foam of profits, or whether the bid will fail after all.
AB InBev’s beer challenges
Some of the issues facing AB InBev today are not unique to the company, but rather result from changing beer drinking habits in the United States. The United States has provided AB InBev and other large beer companies with one of their main markets for decades. Today, according to figures from the Brewers Association, these companies are caught between two trends. Overall beer consumption is down, dropping 1% in 2018 alone. 2018 – and continuing to grow.
In response, AB InBev launched a wave of acquisitions around the world. The spending spree added hundreds of brands and subsidiaries to its list, giving it control of around 25% of the global beer market. But that achievement resulted in approximately $100 billion in debt, resulting in a high leverage ratio fluctuating between 130% and 145% in 2019 (compared to an average of around 103% among InBev’s competitors) . However, the company has managed to maintain its return on equity (ROE) at or near the beverage industry average of 11%.
Lower Anheuser-Busch sales volume in the third quarter, down 0.5% in Q3, rattled the company’s shares. After this revenue report, investors sold AB InBev; the stock fell 15.1% in October.
Facing various challenges, AB InBev launched an IPO in Asia hoping to raise $10 billion and expand into booming Chinese and Asian markets, but canceled it in July. In fact, Anheuser-Busch apparently decided that the Asian region was showing enough weakness that it was worth selling its entire Australian unit to Asahi. AB InBev’s Australian beer brands and distributors account for 27% of its profits in the region. As part of the agreement, Asahi will also continue to market certain AB InBev brands manufactured and sold outside Australia, while acquiring ownership or control of local brands.
Securing the $11.3 billion, if the deal materializes in the first quarter of 2020 as expected, will accelerate AB InBev’s scheduled debt repayment by a full year. It also raised about another $5 billion from a small Hong Kong IPO of its remaining Asian assets. Its credit rating should improve sharply as a result, giving it the acquisition leverage it needs to buy new brands in expanding markets that offer strong sales growth in contrast to stable or stagnant growth in Australia. Some Jefferies and Sanford C. Bernstein analysts are speculating that AB InBev will expand into Thailand and Africa — and possibly even increase its holdings in China again, despite the lackluster economic conditions there.
Will regulatory issues disrupt the deal?
A potential hiccup in AB InBev’s latest plan to brew new success while cutting debt came in the form of a warning in December from the Australian Competition and Consumer Commission, also known as the ACCC. Chairman Rod Sims noted that by acquiring Carlton and United Breweries, or CUB, under the deal, Asahi would gain control of around two-thirds of Australia’s entire cider market. While its beer holdings would not be as dominant, as Asahi only controlled 3.5% of the Australian beer market before the acquisition, the acquisition of the CUB and Lion brands would also significantly increase its market share of the beer market. beer. The ACCC will render its final decision in March 2020.
Although this regulatory roadblock has some investors worried, the deal looks likely to still go ahead. As Jefferies analysts pointed out, Asahi is primarily targeting beer market share in Australia, while the ACCC is primarily concerned with the cider market. If the ACCC requires brand assignments before approving the acquisition, it will likely target the cider brands involved in the deal. Given that Asahi primarily wants Corona and several other brands of beer, such divestments would likely not affect the closing.
AB InBev has suffered some setbacks in recent months and years. While the ACCC’s warning represents another source of potential trouble, it’s likely to amount to little more than a hiccup in the end, given the Commission’s focus on cider, not beer. AB InBev’s proactive steps to repay debt ahead of time, expand into new growth markets and pioneer areas like CBD tea in Canada, all show that it has the planning and the initiative needed to potentially pull itself out of its slump. This is worth watching as equities could enjoy a tasty smattering of growth in the near future.
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