AB InBev Gets Better End of Asahi Deal

Asahi is acquiring Carlton & United Breweries from Anheuser-Busch InBev BUD for JPY 1.2 trillion ($11.3 billion) in a deal that we think is financially slightly better for AB InBev than for Asahi. Nevertheless, the valuation effect appears negligible, and we are maintaining our fair value estimates for both companies.

From Asahi’s perspective, we were surprised by this development because the deal is much larger than the bolt-on acquisitions that management had previously expressed interest in. We believe Asahi is eyeing the opportunity to leverage Carlton & United Breweries' production capacity and distribution capabilities to expand sales of the premium brands including Peroni and Super Dry in Australia and potentially in Southeast Asia. The deal, priced at 14.9 times enterprise value/normalized 2018 EBITDA, seems somewhat expensive but is in line with the multiples that Asahi paid for SABMiller’s Western and Eastern European operations in 2016 and 2017.

From AB InBev’s perspective, we think this is a sensible deal that is marginally value-accretive but not materially so, and we are reiterating our $118 fair value estimate for the American depositary receipts. The transaction achieves the objective of the AB InBev’s aborted initial public offering of its Asia business, which was to raise capital for balance sheet deleveraging. It also sheds a slow-growth market from the Asia footprint at a valuation similar to that which would have been generated by the IPO, which would have included China and other faster-growing markets. AB InBev kept hopes alive that it could still return to the market with an issuance of Budweiser APAC at the right valuation, and we believe the Asahi transaction may reignite investor interest, because it will improve the growth profile of AB InBev’s Asian business.

On the other hand, this disposal removes one of AB InBev’s profitable businesses from its balance sheet, where the company generates EBIT margins of about 45%. Our initial estimate is that the sale, assuming it closes Jan. 1, 2020, will be dilutive to group margins by about 40 basis points in 2020 and will lower AB InBev’s 2020 earnings per share by $0.20. We estimate AB InBev will end 2020 with a net debt/EBITDA ratio of 3.6 times, still above its peer group but a level that should allow shareholders to sleep better, given the $12 billion free cash flow run rate.

We think this deal is part of Asahi’s strategy to diversify and expand of its core domestic market of Japan. Carlton & United Breweries currently holds nearly half of Australia’s beer market with Victoria Bitter being one of the best-selling beer brands. In addition to the Carlton & United Breweries brands, Asahi will manufacture partially and distribute all of AB InBev’s global and international brands in Australia. Asahi’s sales in Australia are evenly split between the alcohol and soft beverage operations. The company has been expanding sales of its premium beer brands including Super Dry and Peroni, mostly imported from overseas.

While we believe per capita consumption of beer will continue to fall as consumers moderate alcohol intake, premiumization--the result of an increasing appetite for quality--may hold up brewers’ profitability. Moreover, Australia’s population could hit 30 million in 2029, up from the current 25.2 million, according to the Australian Bureau of Statistics. The rising population may also help deter the speed of volume contraction. Beer and cider volume was flat over the past five years as population growth offset an average 1.2% decline in per capita consumption. We think Japanese companies tend to produce better results in the developed countries when it comes to large-scale acquisitions because they have mixed records in emerging markets.

The deal will be financed by a bridge loan initially, but management intends to borrow about JPY 900 billion while raising the remaining JPY 300 billion through equity financing, which includes a sale of 2.5 million treasury shares and new issuance (up to JPY 200 billion in total) as well as JPY 100 billion in subordinated debt. The acquisition of Carlton & United Breweries will boost Asahi’s net debt/EBITDA ratio to 4 times, the same level it was in 2017, delaying its debt repayment and its goal to reduce net debt/EBITDA to less than 2 times by the end of 2021. The company anticipates net debt/EBITDA will return to the current 3 times by 2022. The equity financing might cause about 8%-9% dilution. Given the high EBIT margins earned by Carlton & United Breweries, at 43%, and relatively stable business, we think Asahi will be able to reduce its debt level. However, risks lie in its premium strategy, which could be jeopardized by the global economic slowdown.