Bearish analyst: “Right now, I wouldn’t touch A-B InBev with a 10-foot pole.”
[Reporter's note: This is the first part of a two-part series, in which we explore the pros and cons of investing in A-B InBev.]
It’s a timely question: Should Americans invest in Anheuser-Busch InBev? Thanks to yesterday’s launch of an American depository receipt trading under the ticker “AHBIY,” folks in North America can have much easier access to the company’s stock. (Or at least, an investment vehicle equating to a share of stock.)
Should you be interested? Paul Larson, an equities strategist at Morningstar and editor of Morningstar StockInvestor, asked consumer products analyst Ann Gilpin that very question.
Ann’s take: For now, investors should stay away from Anheuser-Busch InBev. The company has a big lead over other brewers, but the pace and severity of change in the wake of InBev’s takeover of Anheuser-Busch have created big risks. The company is carrying loads of debt.
It’s only one analyst’s opinion, of course, but we found it interesting. Here follows an edited portion of the interview:
Do you think A-B InBev has a wide economic moat?
A-B InBev has the widest moat in the entire beer industry. It is the largest brewer in the world, controlling about 25 percent of global volume, and dominates many attractive markets, such as the U.S., Canada, Mexico, and Brazil. As such, it can outsell, outmarket, and out-spend any brewer on the face of the planet. In addition, A-B InBev owns four of the top 10 selling beers in the world. This scale and the popularity of its brands allow the firm to generate robust cash flows well above that of its competitors.
There have been many changes at Anheuser-Busch since the merger was consummated. Care to expand?
The A-B acquisition was a mega-deal that cost InBev $52 billion. Since it was financed almost entirely with debt, InBev is eager to get out the machetes to reduce costs at A-B in order to reduce its financial leverage, especially since management bonuses are tied to debt/EBITDA ratios for the next five years.
There have been a number of dramatic changes at the firm, all aimed at cutting costs. Executive suites have been demolished in favor of open seating. Salaries have been rebased to 80 percent -100 percent of the market rate for a comparable job. The company jets and helicopters are for sale, with managers now flying coach class on Southwest.
Marketing and advertising costs are getting slashed. In addition, A-B InBev has notified several suppliers that it will take up to 120 days to pay its bills, instead of the usual 30 days, despite existing contracts in certain cases. It is also reducing its purchase of a special kind of German hop used to make Budweiser.
What are the risks surrounding these changes?
The InBev management team is using its old playbook in A-B’s territory. But with changes so dramatic, we think it is creating a culture clash and rocking the boat with key personnel. Since the acquisition, several senior employees have left, including many advertising and marketing executives with 20-plus years of experience in the industry. Today, the marketing department is run by younger and less-experienced lieutenants. …
The beer industry is highly competitive, and consumer tastes are shifting away from mass domestic beer and toward crafts and imports as well as spirits and wines. Now seems like an inopportune time to reduce advertising and marketing.
Do you think we should be interested in A-B InBev at the moment?
Right now, I wouldn’t touch A-B InBev with a 10- foot pole. It is entirely too leveraged, and the stock price today does not compensate for the amount of risk in an investment in the shares, in my opinion.
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(2 votes, average: 3 out of 5)
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Jeremiah McWilliams is a native Virginian who came to the Post-Dispatch in early 2007 to cover beer and other consumer products. He previously covered manufacturing for the Virginian-Pilot newspaper in Norfolk, Va. He is a graduate of Washington and Lee University. 
Gee, could this possibly be the same Ann Gilpin who thought this acquisition was the greatest thing since sliced bread this time last year? Anyone who couldn’t see that the extreme culture clash would cause key players within A-B to defect… DUH!
I’m sure her reply to that would be that last year’s comments were about the $$$ shareholders earned with the buyout, and not about what was best for the company in the long run. Well, yay for those who got rich in the destruction of what was a profitable company, even with its warts.