Slow road to harmony: SABMiller, AB InBev through ROAM looking glass

It’s unlikely the South African Competition Commission will meet a new April 12 deadline to complete an investigation into Anheuser-Busch InBev NV’s takeover of SABMiller. But despite the potential hiccups in the merger, which Ted Black calls a ‘casino’ gamble, beer is a great business and it’s more than likely going to get the green light. And because of this, Black examines the deal through the ROAM looking glass, and assesses if it’s a good one or not. – Stuart Lowman

By Ted Black*

Mergers and acquisitions are management’s “Casino” gamble. They are the big bets that come with high hopes. Often these aren’t met despite the “synergy” benefits plugged by management when the deals are done.

A main reason for poor returns is that the buyer often pays too much. The seller walks away with the value that becomes “goodwill” on the balance sheet … often a huge, intangible, “Fixed” asset.

Carlos Brito, chief executive of Anheuser-Busch InBev, poses for photographer prior to a news conference in Leuven in this file photo from February 26, 2015. Anheuser-Busch InBev has approached rival SABMiller about a takeover that would form a brewing colossus which makes around a third of the beer consumed globally. REUTERS/Eric Vidal/Files
Carlos Brito, chief executive of AB InBev, poses for photographer prior to a news conference in Leuven in this file photo from February 26, 2015. REUTERS/Eric Vidal/Files

SAB Miller (SAB) and A-B Inbev (ABI) have made many big bets since the late 90s. SAB’s include Miller and Fosters. Today 50% of its asset base is “intangible”. When ABI bought Anheuser Busch it paid a premium of US$35 billion. 70% of its assets were intangible in 2015.

According to ABI’s SEC filing for this deal, the “new company” will show added goodwill and intangible premiums of US$74 billion and US$14.6 billion for SAB’s assets. That’s double SAB’s existing asset base and 22 times its net profit.

It means that 74% of the “new company’s” assets of US$279 billion will be “intangible”. That’s about 16 years worth of forecasted combined net profit. Another big bet!

Read also: UPDATE: AB InBev raises $46bn in bond market to back SABMiller takeover

As to making it work, when the deal was done, some pundits compared their respective management lifestyles and suggested that ABI is more frugal and better at cost control. There will be opportunity to cut some “overhead” which analysts seem to relish because it’s visible, but not that important when you use a ROAM looking glass to compare some critical numbers.

First, look at their relative tangible asset productivity (total assets less the “intangible” ones). This is Sales ÷ Assets (Asset Turnover – ATO). Since the late 1990s, SAB has grown its asset base faster than sales … not easy to rectify when growing through acquisitions, but as you can see in the chart below, a drag on its Cash ROAM (Operating Cash ÷ Assets) performance for years now.

Screen Shot 2016-04-07 at 19.09.58

In contrast to SAB’s south-westerly heading, ABI since 2004 has headed steadily north-east. Despite acquisitions, it has grown sales faster than assets. The ATO link in both cases to their respective Cash ROAM results is clear. Higher ATO leads to higher ROAM.

The next productivity measure in ROAM is the Return on Sales (ROS % – Cash Operating Profit ÷ Sales).

Screen Shot 2016-04-07 at 19.10.13

Again, ABI leads the way. Its Cash ROS% rose from 20.9% in 2004 to 39.7% last year. SAB’s cash margin is also good – 26.2% but a long way behind ABI’s. So what accounts for the wide gap? Is it due to ABI’s lower costs as many seem to think?

The first reaction is to cut payroll and expenses. However, the reality is that SAB is the low cost producer by far. Using ABI CEO Carlos Brito’s numbers in his SEC submission for the acquisition, and a presentation he made late last year, SAB’s production people are probably the best in the beer game. For every $1 of COGS (Cost of Goods Sold) they generate $2.73 in Sales. ABI’s people generate $2.51.

If you look at total Costs/Expenses against beer volumes, then ABI’s cost per litre of beer is 81 cents versus SAB’s 50 cents – a 62% productivity gap.

Read also: AB InBev, SABMiller headwinds. Faces in-depth US regulation.

Yes, SAB’s admin costs are far higher relative to $ sales, and ABI’s marketing and distribution costs are a bit more productive relative to sales but against physical output, SAB beats them hands down.

So what accounts for the big difference in ROS%? Is it due to an awful word used by ABI’s marketing department … “premiumising”? Are their beers so much better that they command much higher prices? Or is it all due to market dominance and the power to set prices? What can SAB’s marketing team learn from them?

On the other hand, is ABI’s big opportunity to learn from SAB’s operating people? Not only are they the lowest cost producers, but they turn their debtors and inventory faster than ABI.

Finally, look at economic profit using a Cost of Equity hurdle of 20%.

Screen Shot 2016-04-07 at 19.10.24

Once again, ABI outperforms SAB. From 2008, it generated a cumulative economic profit of $25 billion but not through relative operating productivity. The reason is it funds only 35% of its asset base with owners’ equity. SAB shareholders fund more than 50%. The cost of capital has been much higher for SAB’s management.

All in all, these numbers tell us that beer is definitely a great business to be in … especially if you dominate markets wherever you compete. It does look as if pricing is the key differing factor and the way ABI achieves a higher ATO and ROAM than SAB does. Its cash operating margin even beats Coca Cola by a long way.

So, with some asset pruning and lifting SAB’s selling prices, the deal should work well shouldn’t it?

  • Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at[email protected].
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