Wednesday 24 January 2018

Share Watch: How beer has brewed up a global behemoth

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John Lynch

I often wonder what would puzzle Rip Van Winkle most about modern business if, as the famous old fable suggested, he woke up today having been asleep for 20 years. As an old tippler himself, Rip would probably first scratch his head and say: 'What on earth has happened to the beer industry?'

When Rip would eventually ring his broker for an explanation, he would be told that many of the familiar names of two decades ago, names like Anheuser-Busch, Stella Artois and Becks, are all lumped into a mega brewer called ABinBev (AB). It is a classic case of 21st century mergers, amalgamations and financial engineering; the target being global dominance. After this, Rip could be excused for wanting to have a lie down.

AB is the sprawling behemoth to beat behemoths. It has over 200 brands, 150 breweries and employs 155,000. It is valued at €180bn and the volume of its beer sales in its four major markets - US, Mexico, China and Brazil - accounts for almost half of the world's beer consumption.

Most of the consolidation has happened in the last 10 years and started in Europe with firms like Interbrew (which controlled big names like Labatts, Bass and Whitbread) falling under the spell of AmBev which was huge in Latin America. After the mega-merger, the enlarged group found itself weak in the world's largest beer market, the USA.

Fast forward another four years and the problem was solved. It acquired Anheuser-Busch for $52bn. To further solidify its position, the group concluded acquisitions for the leading beer companies in Mexico and South Korea.

Today the company, with roots back to the 14th century in Louvain and with its 200 brands, makes the sort of claims to market dominance that would have had Arthur Guinness choking on his pint. No fewer than 16 of the AB brands have sales of almost €1bn each. Its three global brands are Budweiser, Corona and Stella Artois. It has also three international brands which include Becks, the number one German beer. The company also has a comprehensive range of local beers including Bud Light (USA), Jupiter (Belgium), Harbin (China), Skol (Brazil), Siberian Crown (Russia) and Quilines (Argentina).

Its well-known brands in Ireland include Bertie Ahern's esteemed beverage, Bass.

Last year AB generated sales of $47bn (it reports in dollars), mainly from North America, Latin America and Mexico. North America is the company's largest market in terms of revenue, at $16bn, and contributes almost 40pc to operating profits. Its Latin American operation generates almost a third of operating profits on sales of $11bn. Surprisingly, given Interbrew's European origins, it contributes a tiny 7pc to group profits.

The company is a high profit and big margin machine. Investors holding shares over the last 10 years have been richly rewarded. Priced at €15 in 2005, the stock now trades at €111 a share. Revenue last year was $47bn, up from $36bn five years ago. Operating profit at $18.4bn is up from $13.6bn in the same five-year period and its market cap is $180bn, more than double the 2010 figure. The company has close to half of its $1bn share buyback programme completed, but it stresses it will not impact on its acquisition strategy. Its price to earnings multiple works out at a pricey 22. Of concern to investors is that 60pc of the company's sales are in currencies that have depreciated against the dollar. However, the recent fall in oil prices should boost consumer spending.

What next for AB? As a result of its market leading position, any future deals are certain to be subject to intense scrutiny by regulators. With almost 50pc of the US market, the company's at its limits. The possible combination of AB and SAB Miller, its closest competitor, has been the subject of deal chatter. Guinness could be considered - but would Diageo sell - or they could look beyond the beer business and consider the soft drinks business of Pepsi? Either way, the hyperactive brewery group is planning something. AB, with its reasonable dividend, is a safe share in the consumer world.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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