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October 2020
HBP# IES793
AB InBev, Costs of Capital
Introduction
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Jan Simon
It was mid-August 2019 and Maddox Marcus was fidgeting in his chair. He was flipping through
some notes he had taken the previous year during his MBA, while tapping away on his
Bloomberg. He felt edgy. His boss, Luis Felipe Pedreira, CFO & CTO of AB InBev, had requested
a presentation by the end of the month on the firm’s cost of capital and leverage, as well as how
potential changes to both would affect it.
More specifically, he had asked Maddox to: “have a look at how our cost of capital would be
affected in two scenarios: a) if we had 25% more debt and b) if we had 25% less debt, keeping
assets the same. Also, calculate the respective Economic Value Added (EVA) and EVA-spreads
and let me know what you think.”
tC
Upon graduating from one of Europe’s leading business schools, Maddox had joined AB InBev’s
Finance Group. Finance groups, areas or departments typically include planning, budgeting,
treasury, auditing and accounting, as well as controlling for the company’s finances. Among
other things, they are responsible for producing the company’s financial statements.
In companies driven by shareholder value creation, by mergers and acquisitions or where capital
structure optimization is important, the finance area plays a central role in the decision-making
processes of the board and the company’s senior leadership. AB InBev is such a company.
Do
No
Prior to pursuing his MBA, Maddox had been a management consultant, involved in the food
and beverage industry and AB InBev had been one of the firm’s most prominent clients. Though
he had enjoyed the professionalism and work ethic he found in management consulting, he and
his fiancée had envisioned a different life post-MBA. When AB InBev presented its MBA
internship programs on campus, he was quick to apply. The internship had fully met his
expectations and he was made an offer before returning to finish B-school. He had gladly signed
on the dotted line and joined full-time after graduating.
This case was prepared by Professor Jan Simon. October 2020.
IESE cases are designed to promote class discussion rather than to illustrate effective or ineffective management of a given
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AB InBev, Costs of Capital
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Company Background1
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Headquartered in Leuven, Belgium, and with over 500 beer labels and 175,000 employees
globally, AB InBev’s roots go back more than 800 years, when a group of Belgian monks began
brewing a beer called Leffe. The company’s portfolio also included the brand Hoegaarden, a
citrusy wheat beer, produced by brethren in another part of Belgium. It was said that
parishioners skipped church to enjoy the heavenly pleasures produced by these early monks.
Over the years, AB InBev had expanded its activities and brands in other countries: Argentina
(Quilmes), Brazil (Brahma), Canada (Labatt), England (Bass), Germany (Bush), Paraguay
(Paraguaya), Peru (Backus and Johnston), and the U.S. (Anheuser).
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AB InBev2 was the product of various mergers and acquisitions. The name itself hinted at that
fact. “AB” represented the initials of Anheuser-Bush, which was created in 1860 when Adolphus
Bush partnered with Eberhard Anheuser (who had created Anheuser & Co in St.-Louis in 1852)
to form Anheuser-Bush. Its beers include: Budweiser, Busch, Michelob, Natural Light and Ice.
“In” comes from Interbrew, which was formed in 1987 when Belgian breweries Piedboeuf,
established in 1812, and Artois, established in 1366, merged. In 1995, the firm acquired Canada’s
largest brewery: Labatt Brewing Company, founded in 1847. It added Germany’s Beck’s,
established in 1847, to its portfolio in 2002. Readers may have enjoyed Stella Artois, Hoegaaarden,
Becks, Labatt, Piedboeuf3 or Jupiler4, to name a few of its brands.
Brazilian Ambev contributed “Bev” (Companhia de Bebidas das Americas) to the name. It was
created in 1999 by merging Antarctica, established in 1880, with Brahma, established in 1886.
Its beers include Quilmes, Antarctica, Bohemia and Skol.
tC
Interbrew merged with Ambev in 2004 to form InBev. In 2008, it acquired Anheuser-Bush,
becoming AB InBev. Finally, in 2016, it acquired SABMiller.
No
While spirits, wine and beer markets had been growing at a fast clip up until 2010, they began
to recede in 20115. Luckily, M&A was a core element in AB InBev’s strategy long before this
development. This approach was aimed partly at buying market power in maturing markets, and
partly at buying growth in developing markets.
Do
1 Home. Accessed September 17,
2020. https://www.ab-inbev.com.
2 The company name is Anheuser-Bush InBev SA/NV, but is better known as AB InBev.
3 Favorite table beer of case writer’s parents.
4 For
more than three decades sponsor of De Rode Duivels, Belgium’s national soccer team, as well as a favorite drink of
Belgian Special Forces, off-duty (at least during the years the case writer served in them). Its codename was Joe Pyler.
5 “Around the World, Beer Consumption is Falling.”
The Economist. Last modified June 13, 2017.
https://www.economist.com/graphic-detail/2017/06/13/around-the-world-beer-consumption-is-falling.
2
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Figure 1
Source: “Around the World, Beer Consumption is Falling.” The Economist. Last modified June 13, 2017.
https://www.economist.com/graphic-detail/2017/06/13/around-the-world-beer-consumption-is-falling.
Maddox’s Thoughts and Notes
On Strategy
tC
Maddox recalled that mergers and acquisitions, through geographic and product extension, had
been a proven model for shareholder-value creation in mature markets. He had made many
presentations on the subject during his consultant years, convincing clients either to “dress the
company up for sale” or start developing an M&A strategy.
Do
No
Reviewing AB InBev’s6 stock price over the past 10 years, he could appreciate the value that
M&A had helped to create, especially in markets where alcohol consumption was decreasing.
Indeed, AB InBev’s stock performance had comfortably beaten the market index it belonged to
(Bel20) and was on par with SP500 performance, an index that arguably included some of the
world’s largest and most important companies. Many of them, such as Amazon, Alphabet
(parent company of Google), Facebook or Netflix were in fast growing industries. Compared with
its peers, it was keeping pace with most.
6 AB InBev is quoted on the Belgian Stock Exchange and has Bloomberg code ABI BB.
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AB InBev, Costs of Capital
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Figure 2
AB InBev Stock Performance, August 2009-August 2019
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Source: Bloomberg, September 2019.
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No
tC
Figure 3
AB InBev (white) Stock Performance vs. Bel20 (green), August 2009-August 2019
Source: Bloomberg, September 2019.
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Figure 4
AB InBev (white) Stock Performance vs. SP500 (yellow), August 2009-August 2019
Source: Bloomberg, September 2019.
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No
tC
Figure 5
AB InBev (white) Stock Performance vs. Carlsberg (green), Heineken (yellow)
and Diageo (magenta), August-2009-August 2019
Source: Bloomberg, September 2019.
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AB InBev, Costs of Capital
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At the same time, Maddox couldn’t miss the hammering that AB InBev’s stock had received
following the 2016 acquisition of SABMiller. Several things had not gone according to plan. First,
AB InBev had missed earnings estimates for the first three quarters of 2016. This was due to
lower consumption globally, but especially in key markets (Brazil, China, Germany and the U.S.),
combined with a stronger dollar (70% of sales are outside the U.S.).
Second, integration issues had been harder to manage than expected. The number no. 1 player
acquiring the sector’s no. 2 wasn’t expected to be easy, and this had proved to be correct.
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Integration issues, a high debt burden and the sales of premium brands had all had negative
effects on the stock price. Trying to forge one culture while laying off people7 in a sector under
pressure affects company performance. Also, to finance the SABMiller acquisition, AB InBev’s
debt had ballooned by more than $100 billion, substantially affecting the company’s beta, as
both operational risk and financial risk had increased. Additionally, its credit rating had been
downgraded by Moody’s (from A3 to Baa1, 3-notches above junk) while Standard & Poor’s had
put its A- (A minus) rating under “review for downgrade”8 (See Exhibit 1). To avoid further
downgrades, AB Inbev had halved its dividend. As if this weren’t enough, regulators worldwide
had required the merged entity to sell some important assets as a condition for approval.
So far, 2019 had seen a reversal of fortunes and been a great year to be an AB InBev investor.
Its second-quarter earnings had beaten consensus and the company had lowered its leverage
without sacrificing growth (See Exhibit 2 for some of its assets sales). It had innovated with
products and entered new markets. Finally, Standard & Poor’s had confirmed its A- rating. This
was all good news, not to mention that calling off the IPO of its Asian business had had no
negative effect on its stock price.
tC
Maddox noted that while senior management still defended the deal, not in the least for its
access to its fastest growing market, Africa, some sell-side analysts had started to wonder if the
price paid – leverage, price and divestments – had not been excessive9.
On Cost of Capital and Value Creation
Maddox was staring at some of the notes taken in his corporate finance class (See Exhibit 3). He
then scanned some of AB InBev’s financial statements (Exhibit 4). Why had Felipe sounded
nervous? Was there trouble ahead?
Do
No
Tapping on his Bloomberg keyboard, he looked for data which could assist him in calculating AB
InBev’s cost of capital at present capital structure, as well as if it had 25% more debt and if it had
25% less debt (keeping price per share, tax rate and total assets constant). He had already
calculated that the interest coverage ratio would lower from the present ratio to 2.5 in the former
case and increase to 4.25 in the latter. Presently, the company had €125.7 billion in LT-debt,
€34.5 billion in ST-debt and €7 billion in cash. Its equity book value was €71.9 billion on total assets
of €232.1 billion. “If we only had a crystal ball,” thought Maddox, “we could have taken on more
short term.”
7 Thomas Buckley. “AB InBev Said to Plan 5,500 Job Cuts After SABMiller Deal.” Chicagotribune.com. Last modified August 26,
2016. https://www.chicagotribune.com/business/ct-ab-inbev-sabmiller-layoffs-20160826-story.html.
8
“AB InBev Cut by Moody's Amid Struggles to Trim Massive Debt Pile.” Bloomberg.com. Last modified December 11, 2018.
https://www.bloomberg.com/news/articles/2018-12-10/ab-inbev-cut-by-moody-s-amid-struggles-to-trim-massive-debt-pile.
9 “How Deal for SABMiller Left
AB InBev with Lasting Hangover.” Financial Times. Last modified July 24, 2019.
https://www.ft.com/content/bb048b10-ad66-11e9-8030-530adfa879c2.
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Figure 6
AB InBev General Description and Specs, August 2019
Source: Bloomberg, September 2019.
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No
tC
Figure 7
AB InBev Beta, August 2019
Source: Bloomberg, September 2019.
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AB InBev, Costs of Capital
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Figure 8
AB InBev Credit Ratings, August 2019
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Source: Bloomberg, September 2019.
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No
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Figure 9
AB InBev Risk Premium, August 2019
Source: Bloomberg, September 2019.
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AB InBev, Costs of Capital
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With all this data, Maddox was ready for the first part of the task: to calculate AB InBev’s cost of
capital at present level and with +/- 25% in debt as well as the respective EVA and EVA-spreads.
It was getting late though and his friends were awaiting him at his favorite bar, De Rector on De
Oude Markt. It was Friday and they were meeting to enjoy a Karmeliet 10, a good discussion and
each other’s company.
10 Karmeliet Beer is a Tripel of 8.4%. Brewed by Brewery Bosteels (Kwak and Deus), it is the winner of the 2008 World Beer
Awards.
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AB InBev, Costs of Capital
Exhibit 1
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Ratings, Interest Coverage and Spreads
Int. cov. Ratio
>
<
Rating (S&P)
Spread
0.1999999
D
19.38%
0.2
0.6499999
C
14.54%
0.65
0.7999999
CC
11.08%
0.8
1.2499999
CCC
9.00%
1.25
1.4999999
B-
6.60%
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-100000
1.5
1.7499999
B
5.40%
1.75
1.9999999
B+
4.50%
2
2.2499999
BB
3.60%
2.25
2.4999999
BB+
3.00%
2.5
2.9999999
BBB
2.00%
3
4.2499999
A-
1.56%
4.25
5.4999999
A
1.38%
5.5
6.4999999
A+
1.25%
6.5
8.4999999
AA
1.00%
8.5
1000000
AAA
0.75%
Do
No
tC
Source: “Ratings and Coverage Ratios.” Welcome to Pages at the Stern School of Business, New York University.
Accessed September 17, 2020. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm.
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Exhibit 2
No
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Deleveraging AB Inbev
Do
Source: “How Deal for SABMiller Left AB InBev with Lasting Hangover.” Financial Times. Last modified July 24, 2019.
https://www.ft.com/content/bb048b10-ad66-11e9-8030-530adfa879c2.
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AB InBev, Costs of Capital
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Exhibit 3
Maddox Corporate Finance Notes – Cost of Capital/Capital Structure
1. Why Is Cost of Capital (CoC) Such a Central Concept in Finance and Management?
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Important for Managers:
 If I use my assets in such a way that Ra (return on assets) < CoC=> destroying value
(for shareholders). If Ra> CoC => creating value.
 It is one of the measures shareholders will judge me against.
 Debt Holders: Will I get dividends and interest back when I expect it?
 Equity: Am I getting compensated for risk (via dividend and capital gains)?
+ If value destroyed => Share price down
+ If value created => Share price up
 Management should run company (Cy) this way so that through new opportunities,
innovation, new products/markets, improved sales, leaner operations, providers of capital
will be happy.
 Will be a function of risk (higher risk, higher return) and alternatives (hence benchmarking).
Important for Investors:
 Investing in management you think will create value.
 Capital Structure Arbitrage funds will take advantage where there is (perceived) mispricing
between the different instruments of a same capital structure (e.g. debt and equity).
 Note that some investors like to look at EVA (Economic Value Added) and EVA-spread as a
way to see how much shareholder value is created above the cost of capital.
NPV = -I+ CF1/(1+r) + CF2/(1+r)^2 + …
Re= Rf + βe (Rm-Rf) note: βe reflection of a.o. financial risk
Ra=Rf + βa (Rm-Rf)
note: βa is a constant
Rd= Rf + βd (Rm-Rf) note: treat βd as constant for small changes in leverage
Rd = Rf + RP
βa= βe E/(D+E) + βd D/(D+E)
Ra=Re if there is no leverage thus Re=Ra
Re=Ra + D/E (Ra-Rd) if there is leverage
WACC=D/(D+E) (1-Tx) Rd + E/(D+E) Re
EVA=NOPAT- (WACC * Invested Capital), with Invested Capital = Equity + Long- Term Debt
EVA-spread= ROIC-WACC
NOPAT=EBIT * (1-Tx)
Interest Coverage Ratio: EBIT/Interest payments (accountants like a number above 2.5)
ROIC = NOPAT/Invested Capital
NOPAT=Net Operating Profit After Tax or EBIT * (1-Tx)
Terminal Valuet= {FCFt+1 /r} Perpetuity without growth
Terminal Valuet= {FCFt+1 /(r-g)} Perpetuity with constant growth (aka Gordon Shapiro)
EV = Equity + Net Debt (EV: Enterprise Value)
EBIT is a reasonable proxy for operating cash flow
EBITDA is a good proxy for FCFF (Free Cash Flow to the Firm)
Do
No
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
tC
2. Important Formulas
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Exhibit 4
AB InBev Financial Statements (Selected)
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EUR Mio
2018
2017
2016
2015
Volumes
567,066
612,572
500,242
502,246
Revenue
54,619
56,444
45,517
43,604
-20,359
-21,386
-17,803
-17,137
34,260
35,058
27,714
26,467
-17,118
-18,099
-15,171
-13,732
CoGS
Gross Profit
SGA
680
854
732
1,032
Norm EBIT
17,822
17,813
13,275
13,767
Norm EBITDA
22,080
22,084
16,753
17,057
Norm EBITDA %
40%
39%
37%
39%
Tax rate
33%
17%
37%
21%
Net Fin. Cost
-8,729
-6,507
-8,564
-1,453
Interest Expense
-5,941
-5,938
-5,310
-3,442
5,691
9,155
2,769
9,867
2.17
3.98
0.71
4.96
PROFIT
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EPS (DIL)
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Other
Do
No
Source: Company financial statements and instructor adjustments.
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