SINGAPORE (Apr 15): Thai Beverage has spent the past few years on an $8 billion acquisition spree, as it expanded beyond its home market and into other Southeast Asian markets. It bought a 53.59% stake in Saigon Beer Alcohol Beverage Corp (Sabeco), Vietnam’s largest brewery company, and snapped up a 75% stake in the Grand Royal Group, Myanmar’s largest whiskey player. Besides drinks, it is venturing into fast food: It bought the franchise rights to run more than 250 KFC outlets in Thailand.
However, amassing these assets have actually decreased ThaiBev’s net debt to shareholders’ equity to 1.21 times as at Dec 31, 2018 from 1.45 times as at Dec 31, 2017. But this still makes ThaiBev the fifth most heavily geared beverage company in the world.
ThaiBev’s net gearing level is higher than sixth-placed Asahi Group Holdings’ 0.84 times and seventh-placed Heineken’s 0.78 times, but just below fourth-placed Anheuser-Busch InBev’s 1.43 times. AB InBev and Heineken are widely known to be the world’s largest and second-largest brewery companies by volume. Asahi is the seventh-largest brewery company. ThaiBev, in comparison, is not among the world’s 10 largest brewery companies.
The high gearing level has prompted some shareholders to make their worries heard, especially with global interest rates no longer at the rock-bottom level they were at for the past decade. “Do you think [the company] will refinance? Do you think [the company] will generate enough net cash to pay down the debt when maturity comes?” asked a shareholder at the company’s annual investor meeting in Singapore on Feb 25.
The company has a Thai baht-denominated bridging loan of THB100 billion ($4.25 billion) that will mature at year-end. The company says it plans to repay the bridging loan with cash flow from operation, long-term debts and baht-denominated debentures.
Last year, ThaiBev issued multiple tranches of debentures to repay a US dollar-denominated bridging loan of US$1.95 billion ($2.64 billion), which was used to fund the acquisition of Sabeco. All the tranches have fixed coupon rates ranging from 1.79% to 4.16%. The US dollar-denominated bridging loans were obtained from various local and foreign banks.
Of the 12 tranches, two worth a total of THB9.7 billion will mature in 2020. Another two tranches worth a total of THB13.7 billion will be due in 2021. The remaining tranches worth a total of THB103.6 billion will mature from 2022 to 2028.
On March 1, ThaiBev issued a new round of debentures. The first tranche, worth THB31.6 billion and with a fixed coupon rate of 3%, will mature in 2021. The second tranche worth THB11.3 billion, with a fixed coupon rate of 3.5%, will mature in 2024, and the third tranche, worth THB10.1 billion, with a fixed coupon rate of 4%, will mature in 2029.
Strong cash businesses
ThaiBev, in response to queries by The Edge Singapore, shrugs off worries over its gearing level. The group says the three businesses it bought in the past financial year — Grand Royal Group, Sabeco and KFC — all generate cash, which is being used to pare down debt progressively. As at Dec 31, 2018, ThaiBev’s annualised net interest-bearing debt to earnings before interest, taxes, depreciation and amortisation had been reduced to 4.61 times, from 5.48 times as at Sept 30, 2018.
UOB Kay Hian analyst Lucas Teng, who has a “hold” call on the stock, believes ThaiBev’s operating cash flow is strong, given its recurring nature of consumption. And in comparison to peers, ThaiBev seems to have rather similar leverage levels to peers such as AB InBev and Sapporo Holdings.
Historically, the group has been able to deleverage following a major acquisition. In 2012, ThaiBev acquired a 28.6% stake in Fraser and Neave (F&N), which raised its gearing levels to 1.2 times in 2012, but the group managed to pare down its debt to about 0.2 times in 2017.
Andy Sim from DBS Group Research, who has a “buy” recommendation on the stock, is also confident about the group’s operating cash flow. “Essentially, its current operations are very cash-generative and would help it to progressively pare down its debt,” he says.
Sim estimates that ThaiBev should generate THB25 billion and THB30 billion in net operating cash flow for the next two years, respectively. But this is expected to be offset by an annual estimated capex of THB6.5 billion. “Along with expected dividends from F&N and FPL [Frasers Property], and netting off expected dividends to ThaiBev shareholders, we estimate ThaiBev should generate around THB10 billion in available cash each year. This figure should increase as operations at its domestic Thailand and overseas ventures grow,” he adds.
Diversification doubts
ThaiBev’s aggressive M&A [mergers and acquisitions]-fuelled expansion is not unique, and is the fastest way for the company to achieve growth and scale. “The biggest challenge of organic expansion is that it takes a significant amount of time, which means that often, companies need to invest ahead of the returns for [more than five] years,” says Shiv Choudhury, partner and managing director, head of consumer goods practice in Southeast Asia at Boston Consulting Group (BCG).
Indeed, the global giants of today were built via a series of M&A deals with other players across various other markets. AB InBev, for one, was the result of a 2004 merger between Belgium’s Interbrew and Brazil’s AmBev (formally known as Companhia de Bebidas das Américas), followed by the 2008 subsequent acquisition of the US’ Anheuser-Busch for US$52 billion. In 2016, it paid £69 billion for SABMiller, which was founded in South Africa.
Heineken, established in Amsterdam, also acquired many other brewery companies. In 2010, it bought the brewery division of Mexican giant FEMSA. In 2012, Heineken acquired for US$4.1 billion Asia Pacific Breweries, which in turn had acquired a significant stake in New Zealand-based DB Breweries in 2004. APB was previously known as Malayan Breweries, which produced Tiger Beer, and had later acquired Archipelago Brewery, which makes Anchor Beer. In fact, APB was a joint-venture (JV) company between Heineken and F&N formed in 1931. “It is true that we have grown through acquisition[s],” says Andy Hewson, managing director of APB (Singapore), a subsidiary of the Heineken group.
There could be other advantages in making acquisitions. Consumers tend to be loyal to their local brands. When the local brewers are bought over, the acquirer gains a sticky customer base as well. “It is challenging to introduce an international brand and swamp out local competition. Secondly, most local brands are linked to local grassroots culture, especially if they are large players,” notes BCG’s Choudhury.
When AB InBev bought SABMiller, it was a strategy to gain a market foothold in Africa. “The main benefit of acquisitions is not global scale, but local scale,” says Dymfke Kiujpers, senior partner at McKinsey & Co.
Drinks companies are also known to spend heavily on marketing. They need to be efficient logistics players too when they plan production and delivery. When they sell different brands in the same market, they can enjoy economies of scale in logistics. “If I do not just bring Heineken [beer] but also Tiger [beer] — that is of course more efficient than having two [half-empty] trucks to transport each of them separately. And sometimes, that local player has a better network, which is definitely the case for China Resources Beer Holdings,” says Kiujpers, referring to the deal last August in which Heineken paid US$3.1 billion for a 40% stake in the Chinese brewer, which will help distribute Heineken beer in China.
While growth via M&A is fast, there is the inevitable integration phase and that usually takes more than a year, says Choudhury. “The best case we have seen in a smaller firm was a post-merger integration that took 12 months,” he notes. Kiujpers, on the other hand, has a more conservative projection of at least two years before full integration is completed. “It depends on how you run the organisation. You can easily integrate the headquarters within two years. But some of the supply chain elements take a bit more time. Then, you have the IT systems, which also take time.”
But not all investors have been convinced of ThaiBev’s growth strategy. In addition to questions over debt, some shareholders present at the Feb 25 meeting questioned ThaiBev’s diversification into the F&B business, asking whether the company should have just stuck to drinks. Thapana Sirivadhanabhakdi, CEO and president of ThaiBev, explained that the wider product range gives the company more flexibility and room in marketing. “We intend to grow the food outlets, which in return will allow experiential marketing of the products offered,” he told shareholders. Thapana added that, by running its own F&B outlets, the company would be able to get better insights into the overall market and therefore be in a better position to grow further.
Analysts also have reservations about ThaiBev’s diversification into the F&B sector. According to DBS analyst Sim, F&B’s contribution to earnings is still small in relation to ThaiBev’s overall group earnings. “We reckon there is a strategic decision to diversify its reliance on the alcohol business, and with one that is complementary within the F&B businesses,” he says. UOB Kay Hian’s Teng, on the other hand, is neutral on the food segment and does not see the F&B acquisitions complementary to the group’s main line of alcoholic products.
Still, the company is poised to make bigger moves into the F&B business. On April 7, it announced that it had incorporated two JV operating companies that will sell Japanese food.
Mixed results for now
The good news is that ThaiBev’s recent acquisitions are starting to make an impact on its bottom line, albeit with mixed results. For 1QFY2019 ended Dec 31, ThaiBev reported that revenue from its beer business, which includes that of Sabeco, increased 128.6% y-o-y to THB33 billion. Operating profit increased 117.3% y-o-y to THB2.7 billion. However, profit attributable to shareholders dropped 48.6% y-o-y to THB513 million, owing to higher finance costs.
During the same quarter, ThaiBev’s revenue from its spirits business, which includes the Myanmar Grand Royal stake, increased 28.6% y-o-y to THB31.7 billion. Operating profit in the same period was up 36.7% y-o-y to THB7.54 billion and profit attributable to shareholders was up 44.8% y-o-y to THB5.6 billion.
The KFC business contributed higher turnover to ThaiBev’s food business. During the quarter, sales increased 63.9% y-o-y to THB3.82 billion on the back of the higher number of stores from QSR of Asia, a subsidiary of ThaiBev that holds the operations of the KFC outlets. Earnings jumped 11.5% y-o-y to THB175 million.
Overall, ThaiBev reported earnings growth of 144.2% y-o-y to THB7.48 billion on the back of a 59.7% y-o-y growth in revenue to THB72.63 billion for FY2018. Year to date, ThaiBev shares have gained 35.2% to close at 82.5 cents on April 9, valuing the company at $20.8 billion. At this price level, ThaiBev is trading at 21.6 times historical earnings and 19.83 times forward earnings. Of the 20 analysts covering the stock, 13 have “buy” calls and seven, “hold” recommendations.
