ABI to sell off US operations?
A smart banker? Is that an oxymoron or what? A couple years back I was talking to a pretty smart banker; this was right after the InBev purchase of Anheuser Busch. We were talking about where this might lead and he said the feeling on the street was ABI would sooner or later spin off the US (perhaps North American) operations of ABI… load it up with a lot of debt and either take the thing public or more likely sell it to someone… perhaps Pepsi.
I recently told this story to a group of ABI wholesalers and they expressed more than a little concern. Thus I called my smart banker friend and asked him what he thought of this earlier guess. Well Mr. Smart Banker said he’s more confident than ever that this will sooner or later be the end game… and until then ABI treats the US market as the cash cow it is.
Cash Cows are leaders in a market with high share, low growth rates and a mature product portfolio… they generate significantly more cash than they consume… this pretty much defined the old A-B. Under classic strategy these business units should be “milked,” maintained, then eventually harvested as the company continues taking profits and investing as little cash as is possible.
Cash cows provide the fuel to drive a lot of the other base-broadening actions of the company including:
- Providing the needed deep-pockets to turn low market share ventures with high market growth into possible winners and market leaders.
- Covering company-wide admin, R & D costs, debt service, dividends, etc.
And here’s a final kicker… since Cash Cows generate a relatively stable cash flow, its future value can be projected within a reasonable range. And as the final, final kicker… InBev not only saw a Cash Cow just waiting to be had in A-B, they saw a Cash Cow that was EXTEMELY fat… thereby increasing the potential cash flow to anyone willing and audacious enough to go after it. And that they were.
It all makes perfect sense from ABI’s perspective; you use the Cash Cow of the US Anheuser-Busch market to fund your growth around the globe. In addition you now own one of the most important and valuable brand names in the entire world… something you can leverage everywhere you go.
Look at ABI’s actions since the acquisition… they definitely cut the fat. Thereby increasing the “milk” from ol’ Bessie… A-B. And they have shown through their actions they will gladly trade a little market share for more profit… a classic Cash Cow maneuver. There is a rumor they would be willing to lose enough share so they could close a brewery... obviously targeting their least efficient brewery. Have no idea if this is true or not but it is discussed over beers in the distributor world. Look at ABI’s recent pricing moves… moves many on the street question at this point in time with this economy. But from a Cash Cow perspective it makes perfect sense.
As a side note, but what does it mean to an entire industry when its leader is being run from a Cash Cow perspective. How will this impact the other players? – other than everyone making more money, at least for now - Do the wine and spirits folks gain share as the leader’s focus is primarily on milking the cow and spending the milk on markets with a lot more upside potential in other countries? Thoughts to be discussed on another day.
And remember, when I say a Cash Cow should be milked, taking profits and investing as little cash as is possible, I’m not saying they will (or should) be stupid about it. They will of course invest in this business but just not as much as if there were more upside potential. They don’t want to hurt the Cow… just milk it.
Which returns us to the first point in this blog… that ABI will sooner than later divest themselves of the US market. So you might ask why would they be willing to sell their Cash Cow? To which I’d respond, why wouldn’t they if the price was right? A Cash Cow is a wonderful thing but it has little upside potential… remember it already has high market share in a low growth market… where is there left to go? Many high share ABI distributors ask themselves the same question.
For ABI, an international company, where to go is where the action is… like China, India, other places around the world. And again, if the price is right why not get the heck out of Dodge? And remember, because the Cash Cow’s cash flows are relatively steady, it is fairly easy to discount these stable future cash flows back to a present value… if the offer is greater than this, Katie bar the door.
Now I’m not certain if this sell option was Brito and Company’s plan from the beginning but I’d be willing to bet a large sum that it has always been a possibility in their planning… remember that whether you like their plans or not, ABI is filled with A LOT of very smart folks who have shown themselves to be pretty good at this chess game.
Take a fat Cash Cow and turn it into a lean Cash Cow… thus driving the value up by increasing cash flow… in this case significantly. Use your pricing power to increase margins even more, again increasing cash flow and increasing value. Then find a strategic buyer who has synergies with the Cow and the value goes up even more… perhaps far beyond the value of the discounted cash flows. Perhaps someone like Pepsi?
I believe the last couple years have shown something to Brito and Company… the US beer market is a pain in the rear from a supplier perspective.
- Brito talks briefly (as I recall it was one sentence) about the potential for ABI to self-distribute up to 50% of their volume (adding some significant milk to the ol’ cow) and what happens? Laws pop up in state after state ending this possibility.
- They attempt to purchase the remaining shares of a distributorship they have owned FOR YEARS and what happens? A new state law prevents this from happening.
- Although the US beer market might seem as one… we all know it is really 50 different legal worlds… and I’d have to guess the folks at ABI find it a tad annoying to have to deal with this battle day after day.
- And if it comes down to pure power politics at the state level, the beer distributors will win every single time. That’s just the way it is and I don’t think it is going to change.
So if you’re ABI what do you do? You of course continue to milk the cow and attempt to maximize its milk production. At the same time you look for those strategic buyers who could share some of their potential operating synergies with you via the purchase price… Steve and I do this in our brokerage business all the time. ABI continues to own the brands and takes them around the world… with a “don’t let the door hit you on the way out” attitude to the US market.
And since it appears that NO strategic buyer would be able to/want to purchase the ABI distribution network in total (even if you all wanted to sell)… … the new strategic buyer/venture partner is probably going to abandon the current ABI distribution network (where possible) and gain tremendous synergies by using one they already have in place… can you say Pepsi.
I think this was originally part of InBev’s plan… to unlock an incredible cash flow by in effect taking over their own distribution… Brito’s “we can self-distribute 50% of our volume statement”. This would REALLY get that ol’ Cash Cow a’milking. Unfortunately (from ABI’s perspective) they have found they do not have the keys to unlock this treasure. Yes I know, from the distributor’s perspective this isn’t unlocking a treasure but is rather stealing it from its present owners… all a matter of perspective. So the distributor’s legal actions have taken the keys to this treasure from ABI and in all likelihood, they won’t ever get them. But the treasure still awaits. But how to get at it?
It would seem to me that the only way to get this treasure is to find someone who in effect already has the keys… in this case those keys being an already established distribution system. Thus presenting the opportunity to take this treasure by the simple act of leaving the present distribution system. Of course there are only a handful of companies who already have these keys… but all it takes for them to gain the treasure is to be willing to share some of it with ABI via the purchase price. And if history is any guide, treasure always continues to attract those who want to gain the wealth… and this treasure is just waiting to be had. Now of course the legal actions taken in various states would impact the new owner just like ABI but perhaps there is a way around it? The potential savings would be astronomical. Heck, even if there were NO distribution synergies there are probably enough synergies elsewhere to make it work. And if no one steps to the plate for this treasure, ABI simply continues to milk Bessie… a win-win for them regardless of other’s desires to unlock a mountain of treasure.
Harry and Benji can investigate this further from a legal perspective - I’ve got a real job where I make money by actually doing things, not just writing about them ;-) but I don’t see how a new owner could be required to continue to use a network of independent distributors. And I don’t see how they could be required to offer any type of compensation to any party for this change. Their argument would be that distributors HAVE ALREADY been compensated for their work… just look at your cumulative income statement over the past 50 years ;-) Don’t shoot the messenger, I’m just telling you how they will present it.
If this were to happen I’d have to guess the ABI wholesalers might just be SOL. A scary thought indeed. And please let’s be sophisticated in all this… nothing ABI can say about this can have much merit. They are a large publicly traded international company and their words carry much weight… and with the SEC they have to be careful what they say. That’s just the way it is. So distributors are fundamentally on their own on this one.
Although losing a major supplier (with no compensation) might seem strange and unusual, it is actually fairly common throughout industries which use a separate, independent distribution channel… thus I’d have to guess there is A LOT of case law on the subject… most of it probably being bad news for beer distributors. One might wish for this not to be true but I don’t see any fundamental business reason why it isn’t.
But then again, maybe my banker friend isn’t so smart and all of this is just a waste of words on a blog… who knows? I’m just trying to do my job… providing wholesalers with various very real possibilities… whether they want to hear them or not. And helping them analyze and address the world as it quickly changes around them. Plus, it makes great water cooler gossip ;-)
Next post… is your distributorship a Cash Cow, a Star, a Dog or for sale? And what can you do with what you’ve got.