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Anheuser-Busch InBev prioritizes debt reduction
admin | October 26, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Anheuser-Busch InBev has struggled to reduce leverage since their October 2016 acquisition of SABMiller. Moody’s recently put the company on review for downgrade, citing their slower than expected path to deleveraging in part due to underperformance in key emerging markets. Management announced a cut to shareholder dividends in order to accelerate delevering, in conjunction with disappointing third quarter earnings. Anheuser-Busch debt spreads widened out on the news, and longer maturity paper now looks competitive compared to lower-rated credits.
A difficult quarter
Anheuser-Busch InBev (A3*-/A- (n)/BBB) posted third quarter results that fell short of street estimates as volume growth remains muted. Total volumes were up 0.2% in the quarter with beer volumes up 0.5%, but non-beer volumes down 2.4%. Organic revenue growth of 4.5% was below consensus estimates of 5.9%. The company missed both volume and sales estimates across all regions. Management noted that declines in volumes in Brazil, Argentina and South Africa partially offset growth in many of their African markets as well as Mexico and Western Europe. The company continues to lose market share in US, albeit at a slower rate. US market share declined by 50 bp in the quarter, which was an improvement from the 80 bp decline during the year ago period.
On the positive side, global EBITDA increased 7.5% year-over-year, supporting margin growth of 116 bp to 40.3%. Increases in commodity prices partially offset the benefits coming from improvements in top line growth, cost efficiencies and synergies. Management stated that while EBITDA and cash flow performance has been relatively strong, the top line remains below expectations.
Dividend cut to support debt reduction
Management affirmed that capital allocation priorities remain unchanged. The first priority for cash is investment in brands to support organic growth opportunities. The second priority is deleveraging to a net leverage ratio of 2.0x. Third would be M&A opportunities that adhere to their financial discipline and deleveraging commitments, while returning excess cash to shareholders remain its fourth priority.
Since the close of the SAB Miller acquisition, shareholder rewards in the form of the dividend took priority over debt reduction. That said, leverage has barely declined. Estimated total leverage is roughly 5.4x while net leverage is closer to 5.1x. Moody’s recently put the company’s A3 rating on review for a downgrade, noting the pace of debt reduction is falling behind expectations. As such, ABIBB announced a 50% cut to the dividend with 3Q results, reclaiming $4 billion of cash to be used for debt reduction. While the dividend cut is a step in the right direction and technically jumpstarts its deleveraging plan in the back half of 2018 like Moody’s wanted to see, ABIBB has a considerable amount of debt to reduce. Even with EBITDA expected to approach levels of $25 billion within the next 12-18 months, we estimate that ABIBB needs to reduce debt by roughly $19 billion in order to achieve the 4.0x leverage that Moody’s was targeting. S&P previously stated that it could look to downgrade its ratings on ABIBB if management did not take any action to reduce the dividend distribution in November 2018.
Relative Value
ABIBB has been trading more like a full BBB credit as of late, given the high leverage. After earnings were released, spreads widened another 5-7 bp across the curve. The ABIBB 4.9% 2/1/46 is currently trading in the 184/182 context which we view as attractive, even if the credit gets downgraded by Moody’s and S&P. Similar maturity debt of Molson Coors Brewing (Baa3/BBB-/BBB-), the TAP 4.2% 7/15/46, trades slightly wider in the 193/190 area. TAP is still in delevering mode from its purchase of the Miller Coors stake from SABMiller and is currently levered 4.65x. While their leverage is higher, ABIBB benefits from EBITDA margins that are 40%, nearly double the 21.9% margins of Molson Coors.
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