New stock symbol. New owner. New challenges.
U.S. investors have a renewed chance to invest in the iconic King of Beers, now that Anheuser-Busch InBev (OTC BB: AHBIY.PK) has begun trading over the counter in the United States. When Belgian-Brazilian brewer InBev bought Anheuser-Busch last year, the St. Louis brewmaster's shares -- and BUD symbol -- were delisted from the New York Stock Exchange. The company now trades primarily on the Brussels exchange. Now, similar to shares of Finland's Nokia (NYSE:NOK), the brewer's stock is available as an American depositary receipt (ADR). (There is a difference, though: Anheuser-Busch InBev is a Level I ADR, while Nokia is a Level III ADR.)
Investors must decide whether they can swallow the promise of greater efficiencies from the world's largest brewer, especially following the stock's strong run in recent months. Despite those gains, shares are trading at about two-thirds of InBev's 2007 high, and sport a P/E of about 22.
Anheuser-Busch InBev presents a test for U.S. and foreign investors, as it moves to reduce the debt that played a big role in its $52 billion acquisition. To fund that spree, the company took on $45 billion in debt -- just as the world economy was deteriorating. Now, A-B InBev must pare that down, cut operating expenses, and sell assets to remain on the financial schedule that it promised its lenders. It wants to divest $7 billion in "non-core" assets this year.
U.S. beer brawl
The company's most important challenge is the U.S., a mature market where compound annual volume growth has been modest in recent years. This rate is expected to advance even more slowly for the next few years. The good news is that A-B InBev's U.S. shipments have grown steadily in recent years, while shipments for its biggest competitors -- Miller and Coors -- have stagnated, according to Beer Marketer's Insights.
With nearly half of the U.S. market, the company probably won't gain or lose much market share. So the quickest path to more profit is fewer expenses. So far, Anheuser-Busch has exceeded its goals. In March, it forecast shedding $2.25 billion in costs through 2011, exceeding its original goal of $1.5 billion.
In fact, the U.S. beer market is shaping up to be the battle of the cost-cutters, as Anheuser-Busch InBev duels with SABMiller and Molson Coors (NYSE:TAP). Last year, the latter two launched a U.S. joint venture that combined beer operations under one roof, giving the combined Miller and Coors brands 29.4% of beer shipments, versus Anheuser-Busch InBev's 48.9% in 2008. The joint venture's executives say their cost-cutting is ahead of schedule.
Is the price right?
Anheuser-Busch InBev continues to say that divestitures will be made on schedule, despite the weak economy. It recently sold its 19.9% stake of Tsingtao Brewery in China to a Japanese brewer, and its remaining 7% Tsingtao stake to a Chinese investor. It also divested a South Korean brewery to a Kohlberg Kravis Roberts affiliate.
The company also recently agreed to sell four can-and-lid-manufacturing plants to Ball (NYSE:BLL). These plants focus more on the soft-drink industry. The company said there are "no plans or activities" to sell its seven remaining plants, which emphasize beer containers.
Speculation remains that the company's entertainment division -- including Anheuser-Busch's Sea World and Busch Gardens franchises -- remains high on the "to sell" list. Considering the economic climate and the struggling theme-park industry, a qualified buyer, at least in the U.S., may be hard to find anytime soon.
The poor balance sheets of Cedar Fair (NYSE:FUN) and Great Wolf Resorts (NASDAQ:WOLF) won't support an offer. Six Flags has filed for bankruptcy protection. And the strongest of the lot, Disney (NYSE:DIS), doesn't appear to need the additional challenges of buying a competitor, especially one that has three Orlando attractions within shouting distance of Disney World.
Making a choice
You'll notice that I haven't discussed brands. Marketing, advertising, and the Clydesdales will be taking a back seat (or at least a passenger seat) to the balance-sheet issues driving this company.
Initial results from the reorganization are encouraging. First-quarter pro forma revenue rose 4.7% year over year. Operating expenses dropped 6.5%, and profit almost doubled, thanks to the acquisition of Anheuser-Busch. However, the company said the rest of 2009 would be "challenging" and "difficult," adding that first-quarter results probably won't be duplicated.
After the company missed its 2008 financial targets, CEO Carlos Brito and most top executives didn't get bonuses. A Morningstar analyst describes these executives as "a bunch of machete-wielding investment bankers." Yes, guys with machetes can be friends of shareholders.
Prospective investors -- who have seen the short-term performance, listened to long-term goals, and assessed financial challenges -- will have to decide whether Anheuser-Busch InBev's glass is half-full or half-empty.
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