The model portfolio is composed of international investments and is priced in US dollars. All foreign currency holdings are converted to US dollars, based upon closing currency valuations as of the date of publication. Views are solely that of the author, and will differ materially from conventional analysts as well as the investing public at large. The purpose of the model portfolio is to monitor performance of investments written about in this blog, and is not to be construed as research. The blog is written for entertainment purposes only, and does not represent investment advice in any way, shape or form. Always consult an advisor prior to engaging in any investment activity.
Anheuser Busch Inbev total shares outstanding: 1.61 billion
Market Cap: $125.5 billion.
Total Liabilities - cash and short term assets: ($64) billion.
2011 EBITDA: $15.4 billion.
Trailing EV/EBITDA ratio: 12.3X
2012 Forecast EV/EBITDA ratio: 12.2X
The blog model portfolio is adding a new position to the account through the purchase of shares of Anheuser Busch Inbev.
Inbev is the worlds largest brewer. Anheuser-Busch Inbev holds 74% of the voting shares of Ambev (ABV-NYSE, $38.00), the publicly listed South American/Canadian subsidiary.
Inbev is purchasing the remaining financial interest in Grupo Modelo, Mexico's dominant brewer.
Inbev already owns a signficant investment in Modelo and is seeking to take effective 100% control of the brewer of Corona beer. The cost of the acquisition will be roughly $20.1 billion US and the total enterprise value will be about $32.2 billion. This purchase will be primarily funded through debt.
The initial debt financing tranche has already been arranged and priced. BUD has issued $7.5 billion of bonds, carrying average yields of 2.1%.
At the completion of the purchase and total consolidation of the balance sheets on the books, Inbev will have an enterprise value of about $220 billion. Forecast 2012 EBITDA, on a pro-forma basis, is estimated to be almost $18 billion. This implies a 2012 year end combined EV/EBITDA ratio of about 12.2x
The completion of the acquisition will significantly increase Inbev's presence in the Americas.
The rational for the acquisition is one of cost control and cross marketing of product lines to increase EBITDA margins.
Mexico has one of the fastest growing economies in the Americas and Modelo is the dominant brewer in Mexico. In 2011 Inbev EBITDA margins were 39.3%. Modelo margins in 2011 were 31%, far below levels considered acceptable by those at Inbev. The combined companies should also be able to reduce selling and administrative expenses by consolidating certain units.
Consolidated revenues for 2012 at Inbev-Modelo could surpass $48 billion US. Should Inbev continue to generate revenue growth at historic norms, 2013 revenues could touch 51 billion. Provided that best practises take hold at Modelo quickly, 2013 consolidated EBITDA could reach $20 billion.
Based on the inexpensive bond financing, the consolidation of the remainder of Modelo looks to be wildly accretive, even in the short term.
Interest on $20.1 billion at an average yield of 2ish percent represents about $430 million of annual expense. BUD is paying this to generate an extra $1.25 billion of EBITDA from Modelo on the full consolidition. That's just the benefit of the purchase today on closing. Then, add to that the hundreds of millions of dollars of real synergies that can be readily wrung out of the combination. Finally, add in the monopoly ability to increase prices at Modelo, and the transaction appears to be highly attractive over any timeframe, be it short, medium or long term.
Inbev will be the dominant brewer in ALL of the Americas.
Inbev, through its Ambev subsidiary, is the monopoly brewer of Brazil. Skol, Brahma and Antarctica are the key Brazilian brands and are being rolled out on a regional and/or global basis. When added to the Mexican portfolio, with the dominant brands of Modelo and Corona, Inbev will have monopoly status in all of North and South America. American market share, as one example, will exceed 52% upon consolidation of the two businesses.
A low interest rate, low energy price and low commodity price cycle is generally an optimum period for consumer products companies.
Inbev will be using the advantageous interest rate environment ot its benefit, through conventional bond financing for the purchase. The high EBITDA to be generated will be used to steadily pay down debt.
Once the purchase of Modelo is completed, Inbev will be larger, on a global basis, than the next two largest global brewers (SAB Miller and Heineken) combined. Inbev will also be generating higher EBITDA than than next three top global brewers (SAB Miller, Heineken and Carlsberg) combined.
Inbev is not a hidden value by any means.
Muscular global monopolies with world leading EBITDA margins seldom remain undiscovered gems. However, the addition of Modelo's business, featuring fast growing revenues and relatively low EBITDA margins, in conjunction with the current economic environment (flat-declining packaging and transportation costs), suggests that BUD will quickly improve EBITDA at the acquired division. There could be positive surprises in store over the next two years; analysts typically have to play catch up for some time when major acquisitions occur.
Also, if there is any economic sector that has potential to generate positive surprises, it is likely to be the consumer staples sector. Restrained global economic growth, provided that inflation remains muted, has often proved to be a near perfect operating environment for consumer staples companies.
Mexico's strength certainly belies the media reports of a European led global meltdown. Brazil has a fast growing middle class and there are consumer secular drivers, for beer consumption, that look to continue right through 2016.
Inbev provides the blog model portfolio with an opportunity to own the world's most efficient brewer and simultaneously increase portfolio exposure to the fast growing Mexican economy.
Inbev's purchase of Modelo looks to be strongly accretive to common shareholders. Inbev's 2017 bonds yield less than 2.2%. Should the entire acquisition be funded with debt, which is possible given the strong cash generation at Inbev, purchasing 30% plus EBITDA margins using debt priced below 3% implies a very strong pickup in 2013 earnings at Inbev.
According, the blog model portfolio will be purchasing 1000 shares of Inbev at the market today. A $250 full service commission will be applied towards the purchase price, which brings the total investment to $78,100 US.
The blog model portfolio will also be adding to the existing positions as follows.
A. The portfolio will be adding 7205 shares of Chedraui B (chraui.b, Mx-35.55) on the Mexican Bolsa. At an estimated cost of $2.66 US per share, this represents an investment of $19,166 plus full service commission of $200.
B. The portfolio will be adding 47 shares of Novo Nordisk (NVO, NYSE-$147)) on the New York Stock exchange. The investment is $6909 US plus full service commission of $100.
C. The portfolio will be adding 70 shares of Mastercard (MA-NYSE, $443.89) on the New York Stock exchange. The investment is $31,072.3 plus a $200 full service commission.
D. The portfolio will be adding 560 shares of BF&M Insurance on the Bermuda Stock exchange (BFM-BSX, $15.99). The investment is $8954.4 US plus $150 full service commission.
Finally, the blog model portfolio will be adding 900 GDR (global depository receipts) of Hyundai Motor Corp. (HYMTF-OTC, $29.25) to the account.
Hyundai is my contrarian pick in the global markets. In 2011, Hyundai generated almost as much in total EBITDA as did General Motors (a company with almost 2X the global sales of Hyundai). Hyundai generates higher EBITDA margins than any other mass market automobile manufacturer on the planet today. In 2011, HYMTF generated EBITDA margins of 13.4%. For 2012, it appears that margins may rise to 14%. The company is selling for about 6.7X the 2011 EV/EBITDA ratio and roughly 7X the trailing 2011 EPS.
Given the high EBITDA and fast rising sales, it appears that Hyundai, with forecast 2012 production of 4.4 million vehicles, will surpass General Motors in terms of EBITDA and net profits by the end of 2012.
Frankly, the greatest obstacle in the way of Hyundai is getting new capacity to the marketplace. Hyundai management only opens up new facilities once it had been determined that incremental demand exists for a minimum of 300,000 vehicles per year of output. 2012 capacity is being raised by roughly 4.5% or 200,000 vehicles. A new plant is being opened in Brazil in 2013.
All existing plants at Hyundai are running effectively at 100% capacity; some, with a responsive workforce, are actually producing beyond capacity. The Alabama assembly plant, as an example, has a rated capacity of 300,000 vehicles per annum; a third shift has recently been added and 2012 production might be as high as 385,000 vehicles.
There is considerable speculation as to the probability of Hyundai adding a second North American production facility, either in Mexico, or possibly the United States. Revenue, EBITDA margins and earnings should be nicely higher in 2012 vs 2011. 2011 was Hyundai's best year ever and 2012, thus far, is readily surpassing the 2011 results. The GDR of Hyundai, in sharp contrast to current prospects, is down about 30% from the 52 week high of $38 US.
For some time now, I have wanted to add Hyundai Motor Corp. to the panapoly of securities that is the blog model portfolio. The business model appears to be the best in the automotive industry. Hyundai has no ambititions of being the world's largest vehicle producer; the corporate objective is to be the most profitable mass market vehicle producer, on a per unit basis.
Currently, the cash position is sufficiently high, and the price of HYMTF is sufficiently inexpensive, that a purchase seems oportune. I am buying shares of HYMTF today, am paying a $150 full service commission on top of the market price and also own the shares personally. The total investment in HYMTF, including the commission, is $26,475. The shares also trade on the London Stock exchange, in US dollars, under the symbol HYUD.