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Asahi shares fall 8.9% on debt-fueled A$16B Carlton & United Breweries deal


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Asahi shares fall 8.9% on debt-fueled A$16B Carlton & United Breweries deal

Shares of Asahi Group Holdings Ltd. plunged 8.9% to ¥4,591 on July 22 following the announcement of its A$16 billion acquisition of Australia's Carlton & United Breweries from Anheuser-Busch InBev SA.

The market's tepid response to the deal reflects wariness over Asahi's growing debt pile from its expansion spree. The Japanese brewer said July 19 that it plans to secure a ¥1.2 trillion bridge loan and sell ¥200 billion worth of new stock to pay for the Australian assets.

In a research note, Morningstar analyst Jeanie Chen said the valuation of Carlton & United Breweries at 14.9x its normalized EBITDA for 2018 is sensible for AB InBev after its botched Asia IPO but somewhat expensive for Asahi. However, the valuation is in line with the multiples that Asahi paid for SABMiller's Western and Eastern European operations in 2016 and 2017.

Chen noted that the acquisition would increase Asahi's net debt-to-EBITDA ratio to 4x, a setback to its plan of reducing net debt-to-EBITDA to less than 2x by 2021.

Nevertheless, Carlton & United Breweries' relatively stable business and high EBIT margin of 43% will help Asahi reduce its debt level in the longer term. Asahi is expected to return to its current 3x net debt-to-EBITDA ratio by 2022, Chen said.

If the acquisition is approved by the Australian Competition and Consumer Commission and the Foreign Investment Review Board, Asahi, together with its compatriot Kirin Group Holdings Ltd. — owner of Lion Beer — will command about 90% of the Australian beer market, the Sydney Morning Herald estimated.

"Asahi is eyeing the opportunity to leverage Carlton & United Breweries' production capacity and distribution capabilities to expand sales of the premium brands including Peroni and Super Dry in Australia and potentially in Southeast Asia," Chen said in the note.

The deal is unlikely to be rejected by regulators, although Asahi might be asked to dispose of AB InBev brands it would have commercial rights to, according to a Bernstein Research note.

The super-premium category may come under scrutiny. Corona, Becks, Stella Artois and Budweiser together have a 53% share of the segment and comprise 18% of Carlton & United Breweries' overall volumes, followed by Asahi's 7% share, the note said.

Bernstein analysts said Asahi could afford to lose almost all other AB InBev brands except Corona.

"Corona is by far the most valuable brand both strategically and financially (10% of Carlton & United Breweries volume, 14% of operating profit by our estimates) and we would view the loss of Corona distribution as a deal-breaker for Asahi. Corona sells just under 1 million hectoliters in Australia, has a 35% share of the super-premium segment and is a must-stock brand for trade retailers," the note said.

Like any other mature beer market, Chen said premiumization is key to Asahi's profitability in Australia. Unlike other developed geographies, however, Australia's population is growing and expected to hit 30 million in 2029, according to the Australian Bureau of Statistics.

"Beer and cider volume was flat over the past five years as population growth offset an average 1.2% decline in per capita consumption. We think Japanese companies tend to produce better results in the developed countries when it comes to large-scale acquisitions because they have mixed records in emerging markets," Chen said.

The deal was announced after the close of the Japanese market July 19. AB InBev's Brussels-listed shares closed up 5.5% at 83.61 on July 19.

Asahi did not respond to a request for comment from S&P Global Market Intelligence.

As of July 19, US$1 was equivalent to ¥107.73.