Beer giant is testing investors

In September 2015, AB InBev – already the world’s largest brewer at the time – made a massive US$60 billion offer for SABMiller, which had a primary listing on the London Stock Exchange. This transaction was the third biggest acquisition agreement ever in the UK.

Trading in SABMiller shares on the JSE was suspended on 29 September 2016. With a market capitalisation of more than R1.3 trillion this blue-chip company, AB InBev had the largest weighting in the JSE All Share Index, after Naspers. SABMiller rewarded investors handsomely with a share price that tripled in the previous five years. Hence many investors did not hesitate to invest the returns from their SABMiller shares with high expectations in AB InBev shares.

AB InBev was listed on the JSE on 11 October 2016, under the code ANH and at a price of R1 846 per share. Five years later, it is trading around R930 per share – i.e. about 50% lower than the original listing price. A total after-tax dividend of R118 since the listing is cold comfort while the current dividend rate is a paltry 1%.

So what went wrong?

AB InBev has a policy of taking over brands with promising growth platforms to expand its distribution network, while ruthlessly cutting the production costs of the acquired companies. Non-core business operations are unbundled or restructured, and subsidiaries are sold. This way, they start managing down their high debt ratios immediately after the takeovers, working towards their long-term goal of achieving a net debt ratio of double their returns before interest, tax, depreciation and amortisation (EBITDA).

The SABMiller transaction increased AB InBev’s net debt ratio to nearly 7 times EBITDA. They have managed to reduce this to 4.4 times over the past five years. Initially, investment analysts and shareholders expected this ratio to reduce much faster, and disgruntled investors have increasingly sold their shares in this company.

Was the SABMiller takeover a mistake?

The takeover has left AB InBev with a debt of over US$100 billion. As far back as 2016, the high leverage and accompanying weak balance sheet raised concern among cynical investors.

The Finmonitor team, however, believes that the transaction will create long-term value despite the increased debt ratio. The management team of AB InBev is known for its success with similar transactions, and this takeover was a well-considered decision. They waited patiently until they could buy SABMiller at a price that would create long-term value, as indicated by their calculations. Although many of AB InBev’s critics in hindsight believe that the price they paid for SABMiller was too high, they still admit that the takeover gave AB InBev attractive, growing enterprises with good long-term prospects.

Since the takeover various external events, including Covid-19, have clouded AB InBev’s forecasts despite the successful integration of SABMiller. This has resulted in their EBITDA increasing at a slower pace than what could be expected in more favourable conditions. A less exemplary management team would probably have caved in under the pressure to unbundle some non-core businesses and subsidiaries at lower prices to reduce the debt. However, reduced prices would have destroyed shareholder wealth. AB InBev’s management iswaiting patiently for more attractive selling prices that will unlock value, according to their calculations. Although this decision has already damaged the share price considerably, management must be praised for their discipline and very exemplary use of their shareholders’ equity. This is just more evidence that managementis employing their capital effectively.

It is these types of takeovers that have transformed AB InBev into an international giant with global scale benefits and unrivalled cost benefits. They have a culture where every manager takes ownership for the performance of the company, and consequently for the creation of shareholder value. They have achieved this by setting challenging but feasible detailed, quantitative performance goals for the entire organisation.

In its first year since listing on the JSE, AB InBev’s share price fell to less than R1 450. The Finmonitor team then (in January 2017) published an article titled Beer giant offers val. Back then we, like most other analysts and portfolio managers, considered the reduction in price a good long-term investment opportunity. Three years later (in January 2020), the share traded at about R1 150. The Finmonitor team then published an article Beer giant treading water and indicated that it was unlikely that the shares of a quality company such as AB InBev would continue to be valued at such a big discount to its fundamental value. Now, nearly two years later, the share price has dropped by another R325. Understandably, shareholders are disillusioned.

Warren Buffett said: “The stock market is a device to transfer money from the impatient to the patient.” While the proverbial blood is flowing in the streets, the biggest pitfall for investors is to be overly pessimistic. However, AB InBev is now testing the patience of even the most experienced long-term investors.

At current price levels, we will keep the share.

NOTE: The information in this article does not constitute financial, tax, legal or investment advice and the companies in the PSG Konsult Group do not guarantee its appropriateness or potential value. Since individual needs and risk profiles differ, we suggest that you consult your qualified financial adviser if necessary. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider (FSP 728).