With summer around the corner, we are entering into peak beer and BBQ season. However, a major brewer has been on a strict diet following an overpriced merger a few years back. With rising interest rates, I was searching the GuruFocus All-in-One Screener, a Premium feature, for companies which are deleveraging rapidly, and that's how I came across Anheuser-Busch InBev SA/NV (BUD, Financial).
About the company
Anheuser-Busch Inbev is the largest brewer in the world with a 28.4% global market share as of 2018. The company is headquartered in Leuven, Belgium and produces over 500 beers, including megabrands like Budweiser, Corona and Stella Artois.
Anheuser-Busch Inbev was formed following the acquisition of American brewer Anheuser-Busch by Belgian-Brazilian brewer InBev in 2008. The Brazilian investment company 3G previously controlled InBev, which was also called Interbrew. Nowadays, 3G Capital still owns approximately 23% of Anheuser-Busch Inbev, and the majority of its top executives are former 3G employees and partners.
Before the merger, Interbrew was the third-largest brewing company in the world by volume, while Anheuser-Busch was the largest, followed by SABMiller in second place. The acquisition of SABMiller by Anheuser-Busch Inbev was completed on Oct. 10, 2016. Basically, Anheuser-Busch Inbev is the result of the previous top three brewers in the world all merging together.
Following its purchase of SABMiller and anticipating anti-trust objections, Anheuser-Busch Inbev offered from the outset to divest the whole of SABMiller's business in France, Italy, the Netherlands and the U.K. to preempt possible concerns of the Commission in those countries. For this package of assets, the company has already accepted an offer from the Japanese brewer Asahi. The settlement requires Anheuser-Busch Inbev to divest SABMiller’s entire U.S. business – including SABMiller’s ownership interest in MillerCoors, the right to brew and sell certain SABMiller beers in the United States and the worldwide Miller beer brand rights.
Earlier, Constellation Brands (STZ, Financial) had acquired the U.S. rights to Corona and other Modelo brands in the United States as part of an anti-trust settlement that allowed Anheuser-Busch Inbev to buy Grupo Modelo, the Mexican brewer of Corona and other Modelo brands in 2013. Anheuser-Busch Inbev still owns and sells Corona and other Modelo brands in Mexico, Canada and other countries.
As we can see, the history of Anheuser-Busch Inbev is a global story that spans continents and generations. It's not just its history, it's the history of beer itself. With a family of devoted brewers all across the globe, the company as a whole can trace its roots back to over 800 years ago, with the Belgian brewer that got its start at the hands of Belgian monks. It was in their abbeys where one of the company's original beer brands, Leffe, came to be.
Digesting the latest big acquisition
As can be seen from the chart below, Anheuser-Busch Inbev took on a lot of debt in 2016 when it acquired SABMiller. It was at that point when debt ballooned to over $120 billion. This scared the stock into a swoon with the price down over 56% from the high. The company also took a big hit during Covid when its on-premises business (bars and restaurants) dried up.
Since then, it has been paying down debt. It paid down a massive $40 billion in debt over the last 6.5 years. This works out to over $6.5 billion a year. This is some serious dedication to getting the balance sheet under control, and one would think the market would reward the stock for that, but that has not been the case.
Now look at the cash flow chart below. The company generates over $8 billion in free cash flow each year and it has seriously cut its dividend, which may explain why investors are sore.
The debt-to-Ebitda ratio is still a bit on the high side at 4.2, but it has come down a lot from nearly 10 in 2016.
Conclusion
Investing is a bit like hockey - you have to skate to where the puck is going to be, not where it is at. I think the puck, a.k.a, the stock price, will eventually follow to where deleveraging is taking us. Anheuser-Busch Inbev keeps looking better the more it deleverages, in my opinion. However, I don't think it is in a good spot just yet. In the next few years, the company looks set to reach a comfortable debt level and could then have the opportunity to direct its prodigious free cash flow towards shareholder returns rather than debt paydown, and that means a potential increase in dividends and buybacks. I fully expect with money in its pocket, Mr. Market will change its mind and bid up the stock. I hope to be in position for that.
