Asahi gambles big time in Europe
A strong warning. Asahi’s acquisition of SABMiller’s central European brands from AB-InBev is a high-stakes, potentially risky strategy to accelerate the Japanese brewer’s international expansion, analysts say.
Asahi has agreed to pay USD 7.8 billion to buy SABMiller’s businesses in the Czech Republic, Poland, Hungary, Slovakia, and Romania, including the Pilsner Urquell brand. The offer values the assets at about 15 times profits (EBITDA), which stood at EUR 494 million in the year ended March 2016, according to Bloomberg calculations. Analysts had thought the assets would sell for 11 times EBITDA, which implies that Asahi seriously overpaid.
Previously, in April 2016 Asahi had purchased SABMiller’s western European assets in the UK, the Netherlands and Italy for USD 2.55 billion. All in all, Asahi has spent over USD 10 billion for European businesses representing 37 million hl in beer sales (2016).
The acquisition will potentially give Asahi a new stable source of revenue as SABMiller was the market leader in Poland, the Czech Republic and Hungary, while occupying number two positions in Romania, Italy and Slovakia. SABMiller/Grolsch ranked third in the Netherlands, behind Heineken and Bavaria.
But that does not mean the deal is risk-free. Europe’s beer markets are very much mature, with sales volumes either flat or in decline. No doubt, competition for market shares will be fierce.
What is more, SABMiller was a world class operator. Many observers doubt there’s a cent left in operational excellence that hasn’t been extracted. How Asahi will be able to run these companies more efficiently to generate more profit than SABMiller did, is a pressing question.
Besides, Asahi does not really have a track record of big overseas achievements in the beer industry. In 2015, it reported a total of 1.0 million hl of beer sales outside Japan, which is little when compared with other global brewers.
Small wonder, investors are fretting that Asahi will not turn these acquisitions into a success. It is feared that Asahi will send expats to Europe who most likely know next to nothing about these markets. These expats will add cost but no value, while existing management will leave. From what we hear, the former SABMiller top management has already departed from the Czech Republic. Sooner than later, market share could be lost, profits decline and impairments loom.
Since the purchases will be financed by bank loans, media say, Asahi's debt level could jump to over 5 times EBITDA, which is sizeable.
Hand-wringing fund managers have said already that investors should worry about the acquisition’s toll on Asahi’s shareholder returns.
