A Work Project, presented as part of the requirements for the Award of a Master Degree in Finance from the
NOVA – School of Business and Economics.
EQUITY RESEARCH HEINEKEN N.V.
BREWING FOR THE FUTURE!
GONÇALO MIGUEL SANTOS 44039
A Project carried out on the Master in Finance Program, under the supervision of:
Francisco Martins
17/12/2021
Abstract
This paper is part of a consolidated report called “Equity Research Heineken N.V”. In this
project, we will analyze the company, study the market, see where it is growing, challenges it
may face soon, and perform a valuation model on these premises. Heineken presents herself
as the second-largest brewing company in the global market share, where the three most
significant players account for more than 40% market. Nowadays, we are witnessing a growth
in popularity for craft and premium beer. Overall, we believe that a company such as Heineken
is a good investment opportunity. Currently, the stock is undervalued, and we believe that this
company has better growth perspectives.
Keywords (up to four)
Heineken
AB Inbev
Carlsberg
Craft
This work used infrastructure and resources funded by Fundação para a Ciência e a Tecnologia
(UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab, Project 22209), POR
Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences DataLab, Project 22209) and POR Norte
(Social Sciences DataLab, Project 22209).
Table of Contents
A Work Project, presented as part of the requirements for the Award of a Master
Degree in Finance from the NOVA – School of Business and Economics.................. 1
Industry Analysis .................................................................................................... 5
PESTEL Analysis ............................................................................................................... 6
§ Political Factors ........................................................................................................................................ 6
§ Economic Factors .................................................................................................................................... 6
§ Technological Factors ............................................................................................................................. 6
§ Environmental Factors ............................................................................................................................ 7
§ Legal Factors ............................................................................................................................................ 7
Porters’ 5 Forces Analysis ............................................................................................... 8
§ Bargaining power from suppliers ........................................................................................................... 8
§ Bargaining power from buyers ............................................................................................................... 8
§ Rivalry Intensity ........................................................................................................................................ 8
§ New Entrants ............................................................................................................................................ 8
§ Substitutes ................................................................................................................................................ 9
§ Conclusion ................................................................................................................................................ 9
Value Drivers & Forecast....................................................................................... 9
Operational Costs .............................................................................................................. 9
Valuation Analysis ................................................................................................ 10
Cost of Equity (Re) ............................................................................................................10
Cost of Debt (Rd) ...............................................................................................................11
Valuation model.................................................................................................................11
Sensitivity Analysis ..........................................................................................................11
Multiples Valuation ...........................................................................................................12
Acquistion of Distell & Namibia to Create Newco........................................................13
Final Recommendations ...................................................................................... 13
This report is part of the … report (annexed) and should be read has an integral part of it.
Industry Analysis
Looking at the overall beer industry, one can observe that this global market has become
quite concentrated. Over the last few decades, several mergers and acquisitions
agreements (M&A) have made the segment less competitive and more challenging for more
diminutive players. The three most prominent corporations in the beer market count for more
than 40% of the market share: AB InBev, Heineken, and Carlsberg. To notice that in 2016
AB InBev, already being the most significant player in the business, strengthened its lead by
Fig.1 – Market Share per Company
Source: Statista
acquiring, at the time, the biggest competitor – SAB Miller. Following this acquisition,
Heineken saw it self-become the second-largest player in the market.
Beer products can be broken into diverse classes according to their quality or alcohol by
volume. The main categories are low to no alcohol, premium, and craft. The market is
dominated mainly by premium beers, where these commonly have alcohol by volume values
above 4,5% and are produced by most companies in the industry. Craft beer is also an
essential category due to the growth in popularity in terms of consumer preferences. They
are allowing customers to better differentiate between products and brands.
Large companies acknowledge the potential in this segment category and have carried
different techniques to cope with this new growth. A few companies are fighting this battle
with their already manufactured beer products, while others are relying upon M&A deals.
Fig.2 – Craft Beer Market U.S
Source: Statista
However, this has proven to be not as simple as one would imagine. Sometimes, consumer
preferences are so oriented to helping smaller and fragile breweries that large corporations
struggle to penetrate such markets. People prefer beer produced by locals rather than beers
manufactured by market leaders, even by acquiring more undersized players.
Another threat brewer companies face is that youngsters are consuming fewer alcoholic
drinks than older generations. Over the last few years, it has become transparent that
alcoholic drinking causes multiple fatalities every year. Consequently, consumption rates are
decreasing across multiple regions, mainly in developed areas. In other words, more senior
Fig.3 – Craft Beer Market Growth Europe
Source: Statista
generations are still ingesting alcohol at high rates while younger consumers are becoming
less dependent on alcohol and forming different relationships with alcoholic beverages caused by the general awareness of health problems.
According to Statista, beer production worldwide has decreased since 2013, from values of
1,97 billions of hectoliters to 1,82 billion hectoliters in 2020. Even though the population
keeps growing globally year after year, consumers’ preferences have shifted, and beer
consumption could risk losing its leadership in alcoholic beverages. Most companies and
Fig.4 – Global Beer Production
Source: Statista
Heineken include having shaped their business model to adjust to such preferences. AB
InBev has publicly reported in that by 2025 they want to become less dependent on the
traditional beer market.
In terms of shipping, we can find two main flows through which companies distribute their
products to their consumers: on-trade, referring to products offerings at bars, restaurants,
and hotels; and off-trade, which includes ways such as all retail sales via hypermarket,
country store or comparable channels. Before the Covid-19 pandemic, revenues were
almost evenly divided between on- and off-trade. However, in the pandemic era 2020-
Fig.5 – Distribution Channels
Source: Statista
onwards, this situation shifted towards the off-trade channels. People saw themselves
isolated at home, and as most restaurants and social gathering places were closed, the only
available option to buy beer was off-trade channels.
PESTEL Analysis
§
Political Factors
Companies operating in this sector are heavily subjected to taxation policies. They must
comply with local and national policies to legally manufacture, distribute and, advertise their
products. For example, Heineken operates worldwide and is under the spotlight of many
different governments and legislations. In other words, if one country has higher taxation
laws, the company will jump through governmental hoops to get their products to their
customer. Also, by distributing globally, exposure to political risk may cause fluctuations in
Fig.6 – Heinekens’ Excise Tax
Source: Heinekens’ Annual Reports
companies’ operations.
Over the past few years’ trade wars have been present between the USA and China,
reducing global trade and demand. In Europe, the situation has not been stable either. Even
though negotiations for Brexit have already been signed, the situation is relatively new, and
both parties are trying to get out of it benefited, which could end up hurting both the European
Union members and the United Kingdom. Poland has also shown interest in abandoning the
Fig.7 – Heineken’s Currency Translation (€M)
Source: Heinekens’ Annual Reports
EU. The tension in the Middle East has been ongoing for years, but it was triggered again
recently. The collapse of the Afghanistan government could impact the global oil supply
chain, increasing the oil price and inflating uncertainty through the globe.
§
Economic Factors
The adverse effect of the Covid-19 pandemic was felt through multiple industries and
businesses. Moreover, the beer market was no different. Companies saw themselves forced
to adapt to a new world, where local restaurants, hotels, pubs, and any social gathering were
closed or forbidden. These trade channels, for example, accounted for around 50% of the
total revenue for Heineken. Consequently, global trade was affected. Witnessing a rise in
price related to a disrupted supply chain, causing the end-product and raw materials to
increase the price. As of October 2021, according to worldometer, more than 295 million
Fig.8 – Covid-19 Cases Worldwide
Source: Worldometer
people have contracted the virus, and nearly 5 million were killed. Authorities worldwide have
been imposing lockdowns and social gathering measures to help regulate and hopefully slow
the spread of the virus. More than 6,94 billion Covid-19 vaccines have been administered,
and 45% of the world population is fully covered. Many developing countries are still behind
these statistics, and experts believe that world vaccination above 70% of the total population
would allow a return to normality.
§
Fig.9 – Vaccination process
Source: Statista
Technological Factors
Technology is fast disrupting multiple industries across the globe. The beer industry is
profoundly dependent on such tools to develop and refine distribution channels. Without the
advances in the technological segment, beer companies would have to use old brewing
methods and could not adequately provide their products globally. Not only does technology
Fig.10 – Growth GDP per geography
Source: IMF
allow companies to become more cost and resource-efficient, but it also helps companies to
reduce their emissions, creating a better recycling environment and treatment of was into
place. However, the technology used by more prominent players is often unaffordable to
smaller enterprises.
In terms of digitalization, Heineken launched in 2007 a project called "Beerwulf" aiming to
create a direct line between the supplier and the final consumer (Beerwulf is a B2C online
beer platform where consumers can order over 1,000 different beers. As of 2020, the
platform showed tremendous potential, having millions of people visiting the platform).
§
Fig.11 – Market Cap of E-Commerce Companies
Source: Bloomberg
Environmental Factors
Brewer companies are under the spotlight as regards resources recycling. Their
manufacturing means make them use and waste valuable resources, making it crucial to
optimize their processes to produce a more sustainable brewing method. Therefore, to
increase the recycling process, one step should be to improve the beer packaging, making
it less dependent on non-reusable materials. Heineken has stated that nowadays, glass
accounts for 30% of supplies used to produce new bottles. The company has also stated
that it is inserted in many projects to develop a perfect recipe to incentivize the final
consumers to return their bottles and reinstate them in the manufacturing process or reuse
them at home for other personal means.
Urbanization and cities conglomerates have come at a cost for the natural environment,
making it less viable for multiple species to co-exist. Water scarcity, for example, has
Fig.12 – E-Commerce Evolution
Source: Statista
become a significant problem for everyone. People in either developing or developed
countries notice that the threats from global warming and climate change are negatively
impacting the availability and quality of water. In the beer industry, it is reported that
producing a liter of beer needs on average seven liters of water. Whereas smaller players
must induce extra water, more prominent players additionally, with the help of their
technological findings and machinery, tend to use three times less water than their more
diminutive rivals. Having apprehended that, Heineken has been investing in “Every Drop”
initiative to help reduce water usage in the factoring process. At the same time, it has been
sponsoring alternatives in agricultural practices to make it more sustainable. Carlsberg, for
example, aims to diminish its water consumption by 50% in all brewers by 2030 – the “Zero
WasteWater” initiative.
Fig.30 – Water Usage p/ hl produced
Source: Companies Annual Reports
In terms of energy management, energy is one of the essential resources for the progress
and growth of a company. Luckily, most brewing companies already use energy that comes
from renewable sources such as sunlight and wind to power their operations.
§
Legal Factors
Beer companies operating in the alcoholic beverages industries are often under the limelight
due to legal issues when packaging, advertising, and labeling. Especially in countries where
alcohol is not permitted, such as Islamic countries, these companies face a tough hurdle to
“Drunk driving is responsible enter and penetrate the market via traditional beer, for example. Also, when advertising their
for 1/3 of traffic-related deaths,
over 10 000 people are killed products, companies must consider the minimum age of each geography and align with a
every year”
caution note concerning the drunk driving problems—considering that drunk driving is
responsible for 10 000 deaths every year, representing 1/3 of all traffic-related deaths.
(WHO)
Porters’ 5 Forces Analysis
§
Bargaining power from suppliers
When looking at the suppliers, one knows that the better its products are, the more
bargaining power. Moreover, in the beer industry, the quality of the raw materials has a
considerable impact on the output. The leading players incorporate some vertical integration
to control their supply. If this is not the case, long-term contracts are signed with independent
suppliers of their raw materials. If the supplier’s industry is highly fragmented, it becomes
easier for brewer companies to negotiate its terms. Additionally, we can find that barley and
hops cultivation industries are quite unconcentrated, leaving independent hop breeders with
Fig.31 – Porters’ 5 Forces Analysis
Source: Analysts estimates
little negotiation power. On the other hand, these farmers include specialized operations that
can alter the quality of the beer and, barley growers can sell their products for animal feed,
making them less dependent on brewing companies. Therefore, we estimate the bargaining
power of suppliers to be moderate/low.
§
Bargaining power from buyers
In terms of buyers, we must consider the two main channels: on-trade and off-trade. Again,
on-trade represents restaurants, bars, and other similar businesses, and off-trade includes
hyper- and supermarkets or similar trades. Analyzing the on-trade chain, one can observe
that this market is highly unconcentrated. In other words, restaurants, for example, unless
global chain brands have little to no negotiation power. However, they enjoy relatively low
switching costs, meaning that they can impose some level of threat.
On the other hand, the off-trade chain offers a more concentrated market where Amazon,
Walmart, Costco, Carrefour, and others account for more extensive domination. As such,
these corporations enjoy low switching costs and some bargaining power due to their market
Fig.32 – Global CAGR by Alcohol Segment
Source: Statista
size. Furthermore, manufacturers and retailers function in different segments, with a slight
possibility of forwarding or backward integration. Overall, the fulmination that buyers can
have on the industry is moderate.
§
Rivalry Intensity
Consolidation is highly present in the beer industry. Nonetheless, brewers can easily
distinguish their products by segments such as a lager or bitter and by quality such as flavor,
color, and aroma. All the top players are large brewers capable of benefiting from economies
“All the top players are large of scale with low marginal fixed costs. From a consumer's perspective, these have a wide
brewers capable of benefiting
variety of beers to choose from. Companies are starting to utilize brand management tactics
from economies of scale with
to enhance their brand to the public eye and make their brands more identifiable. In general,
low marginal fixed costs”
the closest the goals are, the more rivalry will be witnessed among the players. Additionally,
microbreweries offering craft beer is high, especially on emergent markets. Overall, we
believe the industry is quite competitive and intense.
§
New Entrants
brewing industry is relatively capital intensive, and the fact that most of the equipment is
specific for the industry weights down the possibility for new entrants to pose a short-run
threat to already established firms. , If a company wishes to dispose of part of its assets will
mainly rely on other firms in the industry, and most times, these do not wish to acquire
Fig.33 – Covid-19 Impact on Alcohol Industry
Source: Statista
second-handed machinery. Additionally, the need to set up trustworthy supply chains from
barley farmers becomes higher as industry leaders conquer the market.
Although this may seem that new entrants face many obstacles to challenge more prominent
players, we believe that consumers preferences are changing, and more prominent
companies have been adapting but are finding difficulties along the way. Overall, we believe
the threat of new players is moderate.
§
Substitutes
Other alcoholic drinks, such as spiritual drinks and wine, are the main substitutes for beer.
In some key markets, drinking beer is part of cultural tradition while people hang out,
decreasing the preference for other drinks. Beer is in top three most popular drink, being
Fig.34 – Market for Alcoholic Beverages
Source: Statista
surpassed by water and tea, respectively. However, the beer consumption has been
decreasing over the last few years. Most retailers will find they need to store a combination
of beer and other beverages to satisfy the widest potential range of buyers. Overall, the
threat of substitutes is relatively moderate.
§
Conclusion
Finally, given everything stated in the above industry analysis, we believe that Heineken, as
a mature and competitive company, will not face any critical threat soon, but there is cause
for consideration. Highlighting that the industry is relatively concentrated for the top players,
Heineken enjoys a trustworthy relationship with its suppliers and buyers built throughout the
years operating together. Overall, the threat from newer players is also diminished as it
requires significant capital investments, know-how, and capacity to find and establish a
relationship with consumers and suppliers. The current change in consumers preference is
something that Heineken needs to adapt; however, we see this happening smoothly as the
company has the size and stability to compete in new markets and possibly negotiate M&A
deals to strengthen its current position. Therefore, we believe that the company will need to
adjust itself to the current situation, ensuring that it remains competitive and can survive the
constant world evolution, but there are enough conditions for such a company to remain in
power.
Value Drivers & Forecast
Operational Costs
Regarding operating costs, we can observe that the main captions contributing to such
value are the COGS and SG&A. GOGS were treated as merge captions of multiple smaller
captions, such as Non-returnable packaging, Raw materials, Good for resale and, Inventory
movements. We noticed that this caption had maintained a constant percentage over the
sales value when forecasting. However, 2020 showed signs of increasing.
Due to the current economic situation - high inflation and supply chain shortages, we
Fig.78 – Operation Costs Decomposition
Source: Heineken Annual Report
estimate a rise in raw materials for 2021 and 2022. These factors will harm Heinekens' ability
to acquire the required resources for its operations. Therefore, we see this caption becoming
35% of revenues in 2021 and slightly improving to pre-pandemic levels due to the efficiency
targeted in the EverGreen program.
We derive Selling General and Administrative expenses to include marketing and selling
expenses, energy and water, transport expenses, repair and maintenance, and other
expenses. By looking at potential drivers of these captions, we believe it is reasonable to
link it with the revenues level, apart from the repair and maintenance, where we estimated
based on the level of PPE from the previous year.
Nevertheless, in terms of marketing and selling expenses, Heineken has always favored
having a solid global presence, spreading its brand through multiple channels to reach the
maximum number of people. The company established multiple vital alliances across
important areas such as music, sports, and cinema that materialize in global market
campaigns. For example, in the movie Skyfall from the James Bond saga, performed by
Daniel Craig, the main character drinks from a bottle of Heinekens' beer. These deals, and
many others of the exact nature, cost, on average, $100 million for the company. In the
sports industry, we are constantly targeted with Heinekens' slogans, ether in Formula 1
spreading the word of responsible drinking practices, or in UEFA Champions League games,
one of the most-watched sporting events in the world, where, again, Heineken is an official
partner.
The EverGreen program shows plans to recover for the past few years by making more
Fig.80 – Marketing Expenses
Source: Heinekens’ Annual Report
significant investments in marketing expenses and pursuing further strategic partnerships.
As such, we see this caption increasing for the next few years. In the steady-state, we see
this caption normalizing around the percentage values achieved before 2020.
In terms of personnel expenses, again, we considered the statement provided by the
company in the EverGreen project, where they publicly reported that they were aiming to let
go approximately 8 000 employees shortly. In 2020, we can observe that some employees
have been layoff, having reported close to 1 500 fewer employees in 2020 than in 2019.
These, however, are not included in the current plan for the layoff of the following 8 000
employees. Additionally, in the half-year results, the company released that it had already
let go more than half of the targeted 8 000, with the bulk of the remainder to be captured by
the end of the first quarter of 2022. All in all, we linked the number of employees with the
Fig.81 – Number of FTE
Source: Heineken’s Annual Report
volume growth sold and the cost per employee linked with the inflation rate for the remaining
forecasted period.
The company aims to let go,
approximately, 8 000
employees, until 2023
As for tax inputs, we assumed that the corporate tax would be constant throughout our whole
analysis. By studying the past data, we see that this value has been 25% for a couple of
years, and we do not estimate any tax reform change soon.
Valuation Analysis
Cost of Equity (Re)
For the cost of equity, we started by calculating the equity beta and, with the help of the
Capital Asset Pricing Model (CAPM) formula, we derived the appropriate cost of equity. As
Heineken is established in the Netherlands, we assume that a good proxy for the market
would be Stoxx 600 (SXXP) Index; which represents large to small-capitalization enterprises
Fig.85 – Industry Betas
Source: Analysts Computations
through the European region. With this in mind, we regressed this index against Heineken’s
three years of weekly past stock ex-returns to compute the beta equity.
Based on the regression confidence intervals performed on excel, we can assume a low
statistical risk when assuming only the Heineken unlevered beta. With our assumptions for
Fig. 86 – Regression Confidence Intervals
Source: Analyst Computations
the Risk-free rate, we estimate a 30-Year German government bond as a fair proxy for the
risk-free rate, and, according to the McKinsey book on corporate valuation, we determine a
Market Risk Premium of 5,5%. At last, with all inputs made available, we can derive the
actual cost of equity, 4,63%.
Cost of Debt (Rd)
Fig.87 – Capital Structure
Source: Company data; Analysts Estimates
To estimate the Heineken cost of debt, we looked at the company’s longest corporate term
bond, maturing in 2040 and with an amount issued of €850M, and a yield-to-maturity of 1,4%.
WACC Inputs
2020
E2021
Risk-Free Rate
Market Risk Premium
Tax Rate
-0,15%
5,50%
25%
-0,15%
5,50%
25%
Beta Equity Levered
0,87
0,87
cost of debt (rd) of 1,26%. When applying the CAPM formula, we derive a beta of debt of
Beta Debt
Beta Unlevered
0,26
0,72
0,26
0,72
0,23.
3,83%
4,62%
1,26%
3,76%
3,83%
4,63%
1,26%
3,76%
Unlevered Cost of Capital
Cost of Equity
Cost of Debt
WACC
Fig.88 – Weighted Average Cost of Capital
Source: Analysts Computations
Thus, based on Moody’s Corporate Bond Rating Report1, we assumed a loss given default
of 46,1% and an annualized 20-YEARS Baa1 probability of default of 0.31%, leading to a
Valuation model
Looking at how the company has been financing itself over the last few years, one can
observe that Heineken has been somewhat targeting their level of debt (around 23% of the
overall enterprise value). We looked at the average targeting of the last five years and based
on its statements, we can conclude that the company does not intend to change its current
Perpetuity Growth Rate-Based Valuation (€M)
PV of Terminal Value
56 947
Total PV of Cash Flows
17 274
Core Entreprise Value
74 221
Non-Core Value
4 365
Entreprise Value
78 586
Net Debt & Others
-15 253
Equity Value
63 333
Nº of Shares - FY2020
Price per Share
575 625 598
€110,02
capital structure. Therefore, we took a constant debt to enterprise ratio as an average of the
last five years' total debt to enterprise ratio in the forecasted period.
Having made all previous assumptions, we decided to perform our valuation model using
the DCF model, where the present value of expected future cash flows is discounted by
using a Weighted Average Cost of Capital.
Given our line of reasoning, we believe the company will stabilize and reach its mature and
Fig.89 – DCF Target Share Price
Source: Analysts Computations
steady growth around 2040. In 2040, the registered growth rate is at 2,1%, resulting from an
Core Enterprise Value Derivation
Investment Rate on New Capital of 24,12% and a RONIC of 8,69%. The revenue growth
rate is stable at 2,4%, Core ROIC stable at 6,61%, and growth of core FCF stable at 2,3%.
23%
PV of Terminal
Value
Total PV of
Cash Flows
77%
These growth rates are acceptable because it is in line with the estimated inflation rate for
Europe and consistent with a mature industry. Based on the past peer analysis, the Core
ROIC seems to align with the market's competitiveness and peers ROICs.'
From there onwards, the perpetuity formula was used. Given that the WACC is 3,76%, the
Fig.90 – Core EV Derivation
Source: Own analysts
company is still able to create value for its shareholders with their new investments'
strategies. Total Enterprise Value is achieved by adjusting for the net value of non-operating
assets. The Equity value is determined by subtracting the value of net financial liabilities.
As such, the share price derived from the valuation model at the end of 2022 is €110,02.
Assuming the 30% payout policy indicated by the company, a dividend of €0,53 per share is
expected in the course of 2022. As of December 2021, Heineken is currently trading €94,74,
implying the stock is undervalued. The recommendation on Heineken is to “BUY”, given that
Fig.91 – Sum of Parts
Source: Analysts Computations
holding the stock will provide a total return of 17%.
Sensitivity Analysis
1
Data Report – Annual Default Study Corporate Default and Recovery Rates 1920-2017
Given all the assumptions made through our project, we believe it is relevant to perform a
sensitivity analysis on different parameters to access the potential variations that these could
have on the final valuation of the company. We analyzed the Rd vs. Re and the impact it
could bring to the WACC, and we also compared the RONIC vs. IR on new capital to derive
the growth rate in the steady-state. Lastly, we compared the WACC vs. growth rate
Fig.92 – WACC: Rd vs Re
Source: Analysts Computations
fluctuations to derive our stock price based on the analysis performed over the two previous
approaches.
Firstly, for the value of the Re, we derived from the Beta estimates from the upper and lower
bound Betas determined in our statistical regression on the company’s’ stock returns. For
the Rd we assumed as the maximum value the YTM from the companies 30years corporate
bond and the lowest the same value different from the actual Rd computation and the YTM.
Fig.93 – Growth Rate: IR New Capital vs
RONIC
Source: Analysts Estimates
Secondly, we looked at how the growth would vary with different inputs for RONIC and
Investment Rate on new capital. We used these estimates as upper and lowered bound
values by two times the standard deviation of the last ten years of the forecasting period.
From this, it is possible to obtain a table for the perpetual growth rate, values from 1,77%,
slightly lower than the estimated inflation rate in the long-term for Europe, to 2,45%, now
higher than the inflation rate in the steady-state still lower than the nominal GDP growth for
Europe.
Fig.94 – Sensitivity Analysis: Target
Share Price
Source: Analysts Estimates
Finally, a sensitivity analysis to the price per share revealed how sensible the price was to
differences in WACC and g. Note that the values we used for WACC, and g was previously
determined by sensitivity analysis to these two inputs. As it is expected, the closer the WACC
and the g are, the higher the share price will be, the more significant the gap, the more
considerable input for the denominator when discounting the cash flows.
Multiples Valuation
To triangulate with the DCF valuation method, we decided to look at how the Heinekens'
comparables behaved and performed a relative valuation on the industry. We considered
EV/REVENUES ratio, the EV/EBITDA ratio, and the P/E ratio. Given that the Covid-19
pandemic marked 2020 and many businesses struggled financially throughout this period,
Fig.95 – Multiples (2019)
Source: Bloomberg; Analysts Estimates
we believed that basing our valuation on this timeframe would not reflect the current position
of most companies. Therefore, we looked at three different periods; 2019 (a pre-pandemic
stable year); 2020 (struggling through the restrictions and the economic recession); HY2020
plus HY2021 (recovering from the previous years).
For the industry sample, we looked at companies running in the brewer industry that operate
in the same regions that Heineken does, AB InBev, Carlsberg, Diageo, and many others
Fig.96 – Multiples (2020)
Source: Bloomberg; Analysts Estimates
presented in the table. However, some outliers were found and disregarded. For instance,
Molson Coors in 2021 is still showing great difficulties recovering. By looking at their
multiples in 2019, the company reported more stable results. Using their estimates in 2020
produces a negative stock price. Therefore, they were disregarded for the rest of the
analysis.
Fig.97 – Multiples (H20+HY21)
Source: Bloomberg; Analysts Estimates
Based on our perception of Heineken concerning the future and the past, witnessing great
growth perspectives, we conclude that a median approach is not fair for the valuation
process as the company has outperformed the market. We derive an average EV/EBITDA
stock price of €111, an average EV/REVENUES stock price of €134 and, an average P/E
stock price of €124. We believe a "buying strategy" will payoff compared with the actual price
at the end of 2021.
Acquistion of Distell & Namibia to Create Newco
Fig. 98 – Multiples Valuation
Source: Bloomberg; Analysts Estimates
On the 15th of November 2021, Heineken announced its intention to acquire control of Distell
Group Holdings Limited and Namibia Breweries Limited and, consequently, merge its
“NewCo, the new
beverage champion in
South Africa”
operations with HEINEKEN South Africa (SA) into a newly created company named Newco.
With this transaction, the company expects to realize relevant synergies concerning
revenues, costs, logistics, and support in its Southern African business.
HEINEKEN South
Africa (Heineken
SA)
Distell Group
Holdings
Namibia
Breweries
Limited
The first targeted company, Distell, is a South African producer and distributor of alcoholic
beverages such as cider, flavored a, wines, and spirits. Most of the company's business
comes from South Africa, but the company has some presence in the African and
Newly created and unlisted NewCo
international markets. The company sold approximately seven mhl in 2021, and it has
Fig.103 – NewCo Transaction
Source: Heineken’s Press Release
leadership in South Africa in the cider and wine category and second place in the spirits
category.
Namibia Breweries Limited (NBL) is the number one brewery in Namibia, and it is listed on
the Namibia Stock Exchange. It operates in a relatively small country, but its geographical
“Expected relevant costs,
revenue, logistics and
supports sinergies”
proximity to South Africa provides the potential for a strategic partnership.
The proposal by Heineken on which the deal is based can be split into two parts regarding
the two target companies. Firstly, regarding Distell, Heineken will make a recommender offer
to Distell shareholders of R180 in cash per share, valuing the business at R40,1 billion (€2
292M), with a partial share alternative in Newco. Secondly, for NBL, Heineken will be
involved in two steps with the company in this transaction. At first, it will buy NBL's minority
holding (25%) of Heineken SA to control 100% of its South African subsidiary and then obtain
the controlling share over NBL, which is valued at €400 million in the market.
“Heineken investment of
€2,5bn for a minimum of
65% of NewCo (€4bn)” (
“NewCo, the new
beverage champion in
South Africa”
Overall, according to Heineken, the offers for the targets’ shares will totalize in a cash payout of €1,3bn. Furthermore, the company will invest 75% of Heineken SA and its export
business units from some African Markets (by extrapolation, it is implied that they are valued
€”
at approximately €1,2bn). As stated by the company, this would represent a total investment
of €2,5bn in Newco. In a simplified manner, by subtracting the total investment made by
Heineken from the total valuation, one should see an increase in the market cap of €1,5bn.
Heinekens' Stock Daily Price
99
Keeping the same reasoning of simplicity as a way of dealing with scarce information would
imply a minor increase of the share price of around €2,61 in our base scenario.
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Moreover, when looking at the stock reaction toward this announcement, the market does
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89
not believe the acquisition will add that much value to the company. Nevertheless, it is an
85
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HEIA Daily Last Px
Announcement
Fig.104 – Heineken Stock Price Returns
Source: Bloomberg
exciting acquisition that confirms Heineken's awareness of the shift in preferences among
consumers, and it is adapting to meet the changing needs of consumers while diversifying
its business. While this transaction is still dependent on shareholders' approval of both target
companies and regulatory approval, it is worth it for investors to keep a look at this
transaction which is expected to be completed in 2022.
Final Recommendations
At last, summing up all our ideas and perspectives for our investors, we continue to believe
that Heineken N.V. can provide a good investment opportunity for investors that wish to
diversify their portfolio. Comparing the valuation processes performed in our report, either
be DCF, multiples, scenario, sensitivity analysis, or others, we confidently trust that the stock
is currently undervalued on the market. Not to mention all the acquisitions it wishes to
perform, Distell and Namibia, for example, will easily allow the company to reach a higher
market share in the African geography. Nonetheless, given the current economic situation
and uncertainty within the financial markets, we would not be surprised to see some
variations for the stock in the short term.