AB-InBev’s purchase of Cerveceria Nacional Dominicana “pricey”

The deal is done, and the reviews are coming in on AB-InBev’s takeover of the Dominican Republic’s national brewer CND. Market observers agree on two things: the deal is clever but it comes with a high price tag.

According to U.S. media the USD 1.2 billion (EUR 925 million) deal for a 51 percent stake in Presidente parent Cerveceria Nacional Dominicana translates into 24 times CND’s EBITDA. In the past beer industry deals were done on a 12 to 14 times EBITDA basis.

The Brazilian unit of AB-InBev – AmBev – was already in the market, the Caribbean’s second-largest, with its own brewery, but by combining with CND the brewer will now control 99 percent of all beer sales. This should allow AmBev to restore a healthy pricing environment (in other words, AmBev will raise prices) and improve profitability.

When the deal was announced on 17 April 2012, Standard & Poor’s Ratings Services raised its rating on CND to ‘B+’ from ‘B’. This rating means that the issuer or carrier is relatively stable with a moderate chance of default. Thus investors are taking a low to medium risk (or so it is believed).

S&P based its upgrade on CND’s improved financial performance, as evidenced by the company’s debt reduction, successful liability management, and strengthening of its liquidity position, which S&P now considers to be "adequate".

In the second-half of 2011 and during the first few months of 2012, CND strengthened its capital structure through the refinancing of a significant portion of its short-term debt. It also reduced debt and improved its EBITDA margins. On 31 December 2011, CND posted total debt-to-EBITDA, funds from operations-to-total debt, and EBITDA interest coverage ratios of 2.5x, 28.4 percent, and 3.0x respectively, compared to 3.2x, 20.5 percent, and 2.6x in fiscal 2010.

S&P expects these figures will continue to improve slightly in following years. These could result from the company’s focus on reducing debt, the cost and expense control programmes to be realised during the next three years, and the expected operating efficiencies and synergies that would arise from the integration with AmBev’s business in the Dominican Republic.