Last week Anheuser busch InBev (NYSE:BUD) announced its plan to reacquire Oriental Brewing for $5.8 billion. For a company with a market cap in excess of $158 billion, this may seem like small potatoes. However, don't be fooled into neglecting the larger issue at stake here: whether or not Ab InBev management is making good decisions with shareholder capital.
Stewardship. It's a term we throw about as Foolish investors quite a bit, but what does it really mean? For me, it's the defining characteristic of shareholder-minded management. It's more than just protecting what rightfully belongs to the owners of any given company. It involves making rational decisions with the intention of using shareholder funds in a manner that will add the most value for those shareholders. so when we see a company that exercises an option to reacquire a business it sold years ago for three times the then selling price, there's no wonder alarms go off.
The ultimate test
When it comes to corporate matrimony, shareholders would benefit from thinking about how much value the purchased firm will bring to the table compared to the going price. In other words, if Inbev puts up $5.8 billion today, how much free cash flow will this business need to yield in the future, discounted to today, to make the investment a prudent one?
Unfortunately since InBev sold the business to private equity firm KKR back in 2008 and the company has since been held in private hands, it's impossible to gather the right data to make a judgement. Instead we can point to several other factors that could help shed some light on this:
First according to the company, the purchase price only amounts to 11 times Oriental's Earnings Before Interest, Taxes, and Depreciation (EBITDA), a common measure of operating profitability that attempts to a strip away some non-operating and non-cash items that can otherwise distort the bottom line. That's not too shabby especially in light of other recent deals in the space considering Suntory's recent agreement to buy Beam (UNKNOWN:BEAM.DL) for over 20 times EBITDA. Maybe we can chalk this up to Beam's stable of leading brand name spirits or larger geographical reach over Oriental. Either way, InBev's purchase price compares favorably at least at face value.
Second, shareholders should keep in mind InBev previously maintained an exclusive distribution license with Oriental for its major brands. So it's not out of the realm of possibility to expect Inbev to protect its market share in a fast growing Korean market even if Oriental's EBITDA represents only a fraction of Inbev's.
Lastly, let's not forget Oriental was originally sold off to pave the way for a cleaner balance sheet in relation to InBev's acquisition of Anheuser-Busch. And based on the chart below, it seems that deal worked in investors' favor.
Buying growth or protecting moats?
While this deal might seem small to even merit such a question, investors would benefit nonetheless from making sure all deals, no matter how large or small, always serve their best interests. Get more insight on this and more as the Consumer Goods team at the Motley Fool discusses this development in the video below.