Brito Claws Back

FILED JANUARY 14, 2019

Dear Client:

Lordy, the year 2018 was a tough one for AB InBev chief Carlos Brito. Amid soft sales, a costly and complex integration with SABMiller, uneven currency exchanges, market share losses in its largest market, a stock price down 38%, and most of all a crippling $105 billion debt load that reduced their Moody's rating just a few steps from junk and forced them to cut their dividend in half, ABI came limping into 2019 like a big grizzly bear with arrows in its back -- still a huge force to be reckoned with, but weakened.

ABI's net debt at midsummer last year was around $109 billion, nearly 5 times trailing Ebitda. As Bloomberg said, "Getting leverage down to its pre-deal level of around 3 times Ebitda is going to be a slog."

ED. NOTE: This Bloomberg chart of their stock price relative to peers says it all:

But …… You know what we consistently say, in the publicly traded beer business at least, never bet against Brito, Hackett (now Hetterich), nor Koch, as they've continually proved to be both smart and lucky, and a lot of the latter attaches to them.

Brito likely has a $5 billion card up his sleeve, and they floated a trial balloon on Friday (likely leaked to Bloomberg first we understand, then FT, according to a source) to see how the market would react. And so far, the market likey-a-loty as ABI shares jumped Friday on the speculation.

The deal: Sell a minority stake of ABI's entire Asian business in an IPO, listing in Hong Kong. Their entire Asian beer business, which is about 17% of their sales, could be valued at as much as $70 billion, which would raise about $5 billion for ABI depending on how much stock they floated. While it's just a fraction of what he owes, "Five billion aye quite a shite o' quid if Bob's your uncle", as one northern UK financial journalist told me on Sunday, I think, over a broken line.

However, pointing out the high multiple, other banker-types believe ABI's Asian business to be valued only at $40 to $50 billion, which would cut their take unless they increase the float. Are you following me? Valuation down, sell more stock, but reduce future revenue. Life always has its tradeoffs.

NECESSITY. Recall that Moody's lowered ABI's senior unsecured debt ratings last month to Baa1 from A3 due to high debt, putting them three steps from junk status, thereby increasing the costs of their borrowing, while also cutting their dividend in half.

Ed. Note: We expect Constellation to follow down this path in some ways, but a lot of that depends on Canopy Growth reversing their dismal third quarter as the Canadian legal cannabis business finally finds its footing after many hiccups. So far STZ has lost $13 billion in market cap since that investment, far more than the four it invested, and in a best case scenario it will be accretive after 2020. It also means Canopy finding a billion Loonies annually for it to satisfy Constellation's stated goals. That means Canopy needs to get an estimated 25% market share of entire cannabis consumption in Canada (including black market), or find markets elsewhere.

To make a craps analogy, it sounds to me like Constellation is betting on the come, with possible U.S. federal legalization, thereby opening up 90% of cannabis' global market. Canada is cooler and nicer than California, but much smaller.

BACK TO THE RANCH. Cutting ABI's debt by 5% would release a pressure valve on their balance sheet, but it also would mean shedding their ownership percentage of assets in a region that is expected to see fairly strong increases in beer demand in the next five years, particularly in the high end. ABI is the largest foreign brewer in China with about a 15% market share.

TRIAL BALLOON SUCCESS .... But as Bloomberg noted, "Deliberations are at an early stage, and AB InBev could opt against pursuing a transaction, according to the people." But if the markets continue this week to reward the conjecture, I would expect Leuven to pull the trigger on jettisoning a piece of their Asian business fairly soon, even at a $50 billion valuation. Not bad maneuvering in this heatedly volatile market. Eu te saúdo, sir Brito.

BOTTOM LINE. Look, I'm no stock picker, and I don't own shares of any beer stocks either directly or indirectly, so it doesn't matter to me, but if the economy and stock market are about to see a long winter as many "experts" are predicting, I'd sure want to be in defensive stocks which have taken hits lately but still have decent cash flows, personally: BUD, STZ, TAP, SAM coming to mind first. But each of those stocks presents a myriad of complex risks unique to each of them, so be careful out there and don't invest even a dollar based on my advice. Don't be an idiot and consult your licensed financial advisor. But BUD and STZ have levers to pull, and who knows what can happen with leverless TAP? Stay tuned, my fellow beer travellers. We are buckled up for a helluva year.

ABI BACKS DRONE SYSTEM TO PREVENT OUT OF STOCKS, DEBUTING THIS WEEK

Yet another reason to be bullish on A-B. Pensa, a tech company specializing in "autonomous perception systems," is unveiling technology at the giant retail show, NRF 2019, in New York this week purporting to "inform retailers and brands of what is actually on shelves," per release. A-B's ZX Ventures has invested in the company, in fact just having participated in the latest $5 million funding round.

Pensa claims to be the first company to deliver a scalable system that can provide real-time data, "enabling CPG brands and retailers to automatically and systematically track in-store inventory."

How does it work? It uses computer vision to "see" and AI to "learn," about the out of stock situations; "as well as agile, autonomous drones as roving eyes to automate high value visual tasks for the first time."

The company is demonstrating its autonomous perception system at a mocked- up retail store in the Intel booth (#3437) at the NRF show -- in fact, in partnership with A-B, who helped pilot the demonstration.

Those privy to the demonstration will witness how "Pensa's autonomous drone rapidly scans and automatically senses shelf conditions in the beer section of that store with high accuracy. It then reaches conclusions and makes predictions about stockouts and other conditions for sale," per release.

The company has raised a total of $7.2 million, led by Signia Venture Partners, but including others like ZX and ATX Seed Ventures. The newest round of funding will reportedly be used to "fuel adoption of Pensa's retail inventory visibility system and accelerate store trials with large retailers and CPG brands in North America and abroad."

BOTTOM LINE. It sounds terrifying, actually. I'm scared of owls and hawks, both of which would swoop down and claw at my head at my grandfather's ranch at night and day, respectfully. And it continues today. Back then they thought my head was a nest, today they apparently believe it to be a giant egg, and naturally they have the proclivity to roost on it. Screw birds, in all their horrible forms ----- except the turkey buzzard, which hoovers up all the carrion and provides a service better than Waste Management. I'll pass.

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ED. NOTE: DISTRIBUTORS PLEASE PRINT OUT TO YOUR MERCHANDISERS AND SALESPEOPLE: A WEIRD STORY AND ADVICE

On Friday morning a longtime loyal subscriber sent me a screenshot of Beer Business Daily with the correct logo, the correct font, and even the first sentence was the same as Friday's issue. But after that, everything else in the issue was what Trump would call "Fake News".

The "news" was not favorable about his company and he was like, "Hey Harry, WTffffffffffff?" It turns out it was a competitor's sales guys who mocked up a fake issue of BBD as a joke, and it somehow got to accounts outside the building perhaps with the intention to create some disruption.

Luckily the fake issue of BBD was identified very quickly and shut down before any real damage was done. I regret to say, this has happened several times before over the years.

MESSAGE FROM THE PUBLISHER. First, to everybody reading this, please: Making a false issue of BBD using our brand and/or logo is a federal copyright violation and also likely libel and fraud. Yeah, it's kind of a serious deal, don't do it.

Look, I'm not the suing type, so you probably won't get in any trouble by me, but just know it's completely uncool and not the way you want to compete. Do it the old fashioned way which is still legit: Bury your competitors' cases under soft drinks in the back room, or denting their cans with Snapple bottles (they're the thickest and won't break), or stuffing singles up under the ceiling tiles, or unplugging neons, or whatever, all of which I used to do on the daily as a beer salesperson 30 years ago. All in good fun.

But for God's sake, leave my publication out of it. Sabey?


Until tomorrow,

Harry, Jenn, and Jordan

"There's no secret about success. Did you ever know a successful man who didn't tell you about it?" - Kin Hubbard

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YTD sell days Over/Under: 0

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