New Coverage On Anheuser-Busch InBev: Price Estimate At $113

Anheuser-Busch InBev (NYSE:BUD) is the world’s largest beer manufacturer, selling nearly 426 million hectoliters worldwide in 2013. The brewer’s flagship global beer brands include Budweiser, which formed 9.2% of the net volumes last year, and Stella Artois. With the acquisition of the Mexican brewery Grupo Modelo in 2013, Anheuser-Busch added the globally renowned beer brand Corona to its portfolio of over 200 beer brands. Amid stagnating beer sales in developed markets, comprising North America and Western Europe, the brewer has looked to tap into the growth potential of emerging beer markets such as Brazil, Mexico, China and South Korea, mainly by acquiring small regional brands and leveraging its strong marketing and advertising muscle.

Over 60% of Anheuser-Busch’s net revenues in 2013 came from the Americas, owing to the strong market position of the brewer in both the U.S. and Brazil, the company’s two largest markets. In addition to beer, Anheuser-Busch also produces, sells and distributes both carbonated and non-carbonated soft drinks, mainly in Latin America. The company’s soft drink operations primarily comprise of its Brazilian subsidiary Ambev’s bottling and distribution deal with PepsiCo, and a distribution deal with Monster Beverages in South America.

The combination of the Belgium-based Interbrew and Brazilian Ambev in 2004 resulted in the formation of InBev. In 2008, the group acquired Anheuser-Busch, forming Anheuser-Busch InBev. We have a $113 price estimate for Anheuser-Busch InBev, which is roughly 1% above the current market price. We have broken down our analysis of Anheuser-Busch InBev’s beer operations region-wise and separated the soft drinks division. The breakdown is as follows:

1. North America Beer
2. South America Beer
3. Mexico Beer (Grupo Modelo)
4. Europe Beer
5. Asia-Pacific Beer
6. Soft Drinks

See Our Complete Analysis For Anheuser-Busch InBev

Following are some of the trends that have a significant impact on Anheuser-Busch InBev’s valuation:

Anheuser-Busch Looks To Gain From Growing Demand For Mexican Beer

• Grupo Modelo Acquisition And Scope In Mexico:

In June 2013, Anheuser-Busch InBev completed the acquisition of leading Mexican brewer Grupo Modelo in a deal valued at $20.1 billion. Before the combination, Anheuser held just over 35% equity interest in Grupo Modelo, the seventh largest brewery in the world, which imported and distributed Budweiser, Bud Light and O’Doul’s in Mexico. Owing to popular brands such as Corona, Modelo and Pacifico, Grupo Modelo has a huge 58.4% share in Mexico’s beer market, the world’s fourth most profitable beer market, according to Anheuser-Busch. Corona grew 3.9% in terms of volumes last year. Given Grupo Modelo’s strong positioning in Mexico, coupled with large marketing and advertising investments by Anheuser-Busch, the company can improve volume sales in the country as demand for beer grows.

Mexico’s beer market is expected to grow by 2.6% annually through 2020, according to Heineken’s Mexican head of operations. ^[1] This growth is expected to come from rising disposable incomes, growing proportion of the middle-class and drinking age population, and low current levels of penetration. Around 1 million new individuals who are legally permitted to drink are added by Mexico each year, thereby increasing the consumer base for breweries. In addition, as Mexico’s economy is expected to rise by 3.9% in 2014, up from 1.3% in 2013, rising disposable incomes could also bolster beer sales in the country. Although Mexico is the world’s fifth largest beer market at present, the country still has a low per capita beer consumption rate. As compared to nearly 80 liters consumed per person in the U.S. and over 90 liters consumed per person in most European nations, the per capita beer consumption in Mexico is roughly 55 liters. This provides further growth potential for Anheuser-Busch in the country. In 2013, Mexico formed only 5.3% of the company’s net volumes, but this figure includes only volumes reported from June onward, following Grupo Modelo’s acquisition. We expect Mexico volumes to form nearly 9% of Anheuser’s net volumes in the first full year in 2014.

• Import Of Montejo Beer In The United States

As part of an antitrust agreement with the U.S. Justice Department, Anheuser-Busch transferred the operations of the Mexican Piedras Negras brewery and sold the exclusive rights to market and sell Corona as well as some other beers made by Grupo Modelo in the U.S. to Constellation Brands, before the brewer could go ahead with the Grupo Modelo combination. As a result, Anheuser-Busch cannot benefit from the high demand in the U.S. for Corona and Modelo, whose variants form three of the top four imported brands in the country, with combined sales of nearly $1 billion in 2013. ^[2] While the overall beer industry in the U.S. declined by almost 2% in 2013, imported beer, which forms over 14% of the net volumes, grew 4.5% year-over-year. ^[3] Moreover, volumes for the Mexican brews rose twice as much as the total imports due to rising Hispanic population and increased marketing initiatives.

In a bid to gain from the rising Mexican beer demand in the U.S., Anheuser-Busch will import the beer brand Montejo in the Southwestern states starting September this year. Montejo will start selling in California, Arizona, Texas and New Mexico, where 70% of America’s Latino population resides. ^[4] The Hispanic population in the U.S. is expected to grow by 12% between 2015-2020 to form nearly 20% of the country’s net population, which is estimated to grow by only 4% during this period. ^[5] By importing Montejo in the U.S., Anheuser-Busch could further improve its market share from already a strong 47% at present, primarily by eating into Corona, Modelo and other Mexican beer brands’ share in the country.

Anheuser-Busch Acquisitions Strengthen Asia-Pacific Business

• China to Become the Largest Beer Market in Value Terms

China is the largest market for Anheuser-Busch InBev in Asia-Pacific, constituting nearly 95% of the company’s volumes from this region, and around 14.7% of the net volumes in 2013. The country is already the largest beer market in terms of volume, producing 443 million hectoliters last year, nearly double the production volumes in the U.S. China is now set to overtake the U.S. as the world’s largest beer market in terms of value by 2017, owing to continual rise in unit sales and higher anticipated demand for premium beer brands. ^[6] While economy lager formed only 25% of the net volumes in the U.S. in 2013, this segment formed a massive 82% of the net volumes in China. This signals growth potential for premium beer brands in China, which according to Anheuser-Busch, are growing around 2.5 times faster than the overall industry. The brewer’s premium brands Budweiser, Bud Light and the recently launched Budweiser Supreme, could sell higher volumes in China in the next few years. The beer market in China grew by 10% annually between 2008-2013 to $31 billion, still 21% smaller than the U.S. beer market. ^[7] The Chinese beer market is estimated to grow by 45% through 2017, mainly as disposable incomes rise and premium beer sales grow. Growth in premium beer brands in China could also improve Anheuser-Busch’s revenues per unit volume, going forward.

• Re-acquisition Of The South Korean Oriental Brewery

In 2009, Anheuser-Busch completed the sale of its South Korean subsidiary Oriental Brewery to an affiliate of Kohlberg Kravis Roberts for $1.8 billion, as part of its deleveraging strategy following the Anheuser-Busch and Inbev combination. Oriental Brewery continued to hold exclusive licenses to distribute certain Anheuser-Busch brands in South Korea including Budweiser, Bud Ice and Hoegaarden. Early in 2014, Anheuser reacquired Oriental Brewery for $5.8 billion, extending its Asia-Pacific business. Oriental brewery is the largest brewery in South Korea, and along with its closest competitor Hite brewery, holds 98% of the country’s beer market. ^[8] The beer market in South Korea is expected to grow at a CAGR of 3% through 2017, and given the strong foothold of Oriental Brewery in the country, volumes for Anheuser-Busch could increase in the coming future. ^[9]

The beer brand Cass, owned by Oriental Brewery, is the highest-selling beer brand in South Korea. Anheuser announced that Cass would be the official beer sponsor of the FIFA World Cup in Brazil in 2014 for South Korea. Increased marketing and advertising efforts could further attract consumers and increase net South Korea volumes for Anheuser-Busch, going forward. The company’s “Focus brands” in China (Budweiser, Harbin and Sedrin) rose 11% in volumes in the first half of 2014, on the back of strong FIFA World Cup activation. The acquisition of Oriental Brewery in April and four regional breweries in China increased Anheuser’s Asia-Pacific volumes by 15% through June 2014. Going forward, Oriental Brewery is expected to add significant incremental volumes in its first full year in 2015.

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1. Heineken seeks to tap Mexico’s premium beer market, ft.com [↩]
2. Sales of leading imported beer brands in the U.S. in 2013, statista.com [↩]
3. The state of American beer, theatlantic.com [↩]
4. Anheuser-Busch targets Latinos with new Mexican beer import, latimes.com [↩]
5. U.S. demographic projections [↩]
6. China to become largest beer market by 2017, cnbc.com [↩]
7. China beer market revenues [↩]
8. AB InBev buys Oriental Brewery, beveragedaily.com [↩]
9. Beer in South Korea, euromonitor.com [↩]