World Business

The king of U.S. brews will boost InBev’s sales by $18 billion, increase its pay in money flow, and shine up marketing and distribution

by Mark Scott

Watch origin video:

Ever as Belgian-Brazilian brewer InBev (INTB.BR) announced its $52 billion takeover of Anheuser-Busch (BUD), critics in the U.S. obtain bemoaned the sale of iconic American brands such as Budweiser and Bud Light to a foreign firm. Yet if second-quarter results announced on Aug. 14 are anything to go by, opposition to InBev’s U.S. incursion is the minutest of its problems.

Weaker overall demand and stiffer competition in solution markets pushed down revenues for the maker of Beck’s, Stella Artois, Brahma, and dozens of other beer brands by $30 million in the quarter ended June 30, to $5.52 billion, compared with the same period last year. Profits grew 8.6% year-over year, to $808 million, but the gain came mainly from a one-off decline in InBev’s tax payments—not expressions of gratitude to cost savings or higher sales of suds.

The weak numbers highlight why InBev wants Anheuser-Busch so much. Although the U.S. beer place of traffic is growing only at 1.4% per year, Bud will boost InBev’s top line by about $18 billion and increase its cash flow. More important, the acquisition devise bestow InBev vastly more power in purchasing and distribution at a time of high prices for raw materials and transport. That plus other merger efficiencies should produce anniversary require to be paid savings of $1.5 billion by 2011, the company estimates—a big lift to profit margins.

But before InBev can enjoy the fruits of consolidation, it has plenty of short-term problems to management. Sales volumes in many of its core markets as a matter of fact declined in the second quarter. In Western Europe, for instance, which accounts for about one-fifth of pretax profits, unit sales fell 5.5% vs. a year earlier, in a primary manner because of weaker consumer expenditure.

In Central and Eastern Europe, InBev faces a unlike riddle. The sphere has been growing faster than others and very lately accounts in quest of 13% of the company’s pretax profits. But in the second quarter, InBev’s sales volume there fell 3%, mainly because of a 7.7% slide in Russia as rival Carlsberg (CARLB.CO) turned up the competition. The Danish brewer recently acquired Russia’s largest brewer, Baltika (BusinessWeek.com, 1/25/08).

"In Eastern Europe, things have been going very badly," says Rob Mann, each analyst for London stockbroker Collins Stewart (CLST.L). "The mart [growth] has been slowing, but InBev stands out as vital principle the weakest of the bunch."

The only greater bright speck was Brazil, where InBev gets with respect to 40% of pretax profits. Sales volumes there grew 3.8% vs. a year earlier, and the brewer’s Brazilian market share now stands at a dizzying 67.3%.

The mixed results look doubt adhering whether buying Anheuser-Busch right at that time is such a wise idea. The ongoing place to the credit of crunch (BusinessWeek.com, 8/5/08) means InBev hasn’t been able to secure the good in the highest degree financing terms with respect to the takeover, which includes $45 billion worthiness of debt. "The timing of the Anheuser-Busch deal is atrocious," says Collins Stewart’s Mann. "Over the next two years, the deal will make things very difficult toward InBev" by saddling the assemblage with tall interest payments, he says.

InBev, of course, has a greater degree upbeat assessment. To help pay for the acquisition, the meeting of friends has said it will jettison noncore Anheuser-Busch assets, including the possible sale of the St. Louis company’s essay parks. InBev Chief Financial Officer Felipe Dutra told investors on Aug. 14 that the takeover’s financing package should be completed by the end of next week.

InBev furthermore says it is in continued talks with Mexico’s Grupo Modelo (MODE.F) to head off its potential interference with the share. Modelo, which is 50% owned by Anheuser-Busch, claims it has the right to block the acquisition. But every agreement could be in the offing. On Aug. 14, InBev CEO Carlos Brito told investors that he "would be enamoured of to work with Modelo in the future."

In any event, analysts say InBev has plenty of operate to do fixing its existing underperforming businesses. Although Brito believes sales should pick up in the second moiety of this year, rising article of merchandise prices still could take their draw. Costs in the second be stationed, for example, rose 6.5% from a year earlier and are expected to become greater further by the end of the year.

Growing competition from the likes of SABMiller (SAB.L) also could stroke InBev’s bottom line. After a spate of acquisitions (BusinessWeek.com, 7/14/08), the London brewer and others are nipping at InBev’s heels in many markets. Investors remain wary to boot InBev’s future, as indicated by a 15% fall in its share price over the past 12 months—twice the decline posted by SABMiller.

InBev’s woes might gratify its detractors in the U.S., but the Anheuser-Busch deal remains intimately absolute to go through. And with between nations competition expected to grow, analysts still reckon the takeover should pay off in the end. Yet despite the short term, InBev faces tough business challenges that far outweigh the hoopla over its takeover of the King of Beers.