Case Studies

Assessing Execution in Africa

During the second quarter, we spent time in Sub-Saharan Africa observing Anheuser-Busch InBev (ABI) operations on the continent and learning more about the potential of this fast-growing region with a population of over 1 billion people that is expected to double by 2050.  We met with a cross-section of consumer businesses in Ghana, Nigeria, Kenya, Tanzania, and Uganda, and we studied ABI and its competition’s execution at the point of sale.  Many subsidiaries of brewers and other consumer product multinationals are publicly traded in these countries, and we were able to meet the Chief Financial Officers of both ABI’s Tanzanian business and a key East African competitor.

We found that ABI is successfully implementing the strategy that management has communicated over the past few years[1]. The Ghanaian, Nigerian, Tanzanian, and Ugandan beer markets are characterized by fast population growth and low, but increasing, per capita income.  These dynamics promise the huge growth that ABI is working diligently to capture.  In order to realize fully the potential of these markets, ABI will have to convert consumers from high consumption levels of informal alcohol like home brews and spirits (which are as high as 50-80% in Sub-Saharan Africa compared to 5-20% in Latin America) and increase premium product penetration.  The market is characterized by small retail outlets and returnable glass packaging, which both tend to favor the largest brewer in a market.  We observed on the ground that ABI is making consistent progress.  Despite the inevitable volatility associated with these frontier economies, ABI is on track to realize our expectations for high and sustainable volume and earnings growth over the next 20 years in these African markets.

These are examples of ABI market activation initiatives in Lagos, Nigeria. On the left: an enormous Budweiser billboard in the central business district. On the right: Budweiser branding in a supermarket in Lagos’ Ikoyi neighborhood.

In another corner of the world, ABI attempted an initial public offering of its Asian business, which encompasses markets in China (where ABI is the #1 brewer by value), South Korea (#1 by value and volume), Australia (#1 by value and volume), and India (top 3 by value and volume).  While we are generally not fans of any type of financial engineering, this potential listing offered a couple of advantages.  First, we believe that the proposed valuation was rich, making it worth the opportunity to generate proceeds that would be used to pay down debt and increase overall financial flexibility.  ABI’s Asian business represents roughly 14% of total operating earnings.  During the road show, the financial media reported a valuation of $64 billion for the entire Asian business[2].  To put this into context, the market capitalization for all of ABI fell to $132 billion as recently as last December.  Additionally, the newly created Asia-based company would have created a richly-priced stock that ABI, which would have remained an 80%+ owner, could use to pursue acquisitions.  For example, ABI has reportedly expressed interest in purchasing all or part of a brewer in Vietnam.  Ultimately, the market did not meet management’s lofty valuation target, so ABI cancelled the listing (at least for now).  While the pulled offering was a setback, we were encouraged and pleased that management had the discipline to halt the transaction and endure some short-term embarrassment when the valuation did not achieve a level that carried the advantages mentioned above.  We believe that the company’s Asian business is particularly valuable, and management’s unwillingness to sell a portion of ABI’s stake at anything other than an elevated multiple is consistent with this belief.

These pictures illustrate the dichotomy found in the African beer market. On the left: farmers drying millet on the side of the road near Arusha, Tanzania, for use as the main ingredient in home/informal brews. On the right: ABI and competitors’ coolers in formal points of sale in Moshi, Tanzania.

The company did quickly pivot to a sale of its more mature, slower-growing Australia business to Asahi Group.  At an enterprise value of $11.3 billion, the sale will generate proceeds that will be used to retire debt.  This transaction will keep the highest-growth regions of ABI Asian business intact, and management has already reiterated a willingness to revisit an IPO of the remaining core if their valuation targets are met.  Overall, management is being rational about the best ways to increase the company’s financial and strategic flexibility.

[1] Presentations and audio recordings from the Investor Days held on August 7, 8, & 9, 2018, in South Africa can be found under the 2018 section of this webpage: https://www.ab-inbev.com/investors/Presentations.html.  The markets we visited were specifically covered by Roberto Jarrin (President – Africa East, recently promoted) and Annabelle Degroot (President – Africa West).  Please reference their slides for additional detailed market analysis.

[2] https://www.bloomberg.com/news/articles/2019-07-02/ab-inbev-asia-unit-sets-terms-for-9-8-billion-hong-kong-ipo