SABMiller – Anheuser-Busch InBev Deal – Intangible Perspective by Eric Bush, CFA, Gavekal Capital Blog

Two Knowledge Leaders are in the news today: SABMiller and Anheuser-Busch InBev. These two companies have struck a deal to merge which would go down as the third largest deal ever if it is eventually approved by regulators. M&A activity and rumors has helped the brewers sub-industry return 8.66% YTD on a equal-weighted, USD basis.

In general, the brewing sub-industry is not one generally associated with knowledge spending. And this is true if one takes a narrow view of knowledge spending by only defining by research and development (R&D) expenditures. Kirin Holdings invests the most as they spend 2.6% of its sales on R&D. Anheuser-Busch InBev spends 0.5% of its sales on R&D while SABMiller doesn’t spend any of its sales on R&D. However, as any fan of the NFL (or any major sporting league for that matter) can tell you, brewers are big time investors in other intangible investments such as advertising and brand building. On average, developed world brewers spend about 8.9% of its sales on advertising and other firm specific resources. Somewhat surprisingly, Anheuser-Busch InBev and SABMiller both spend less than the average amount on other intangible investments. Anheuser-Busch InBev spends 8.3% of its sales on advertising and firm specific resources while SABMiller spends 5.5%. They are both two of the largest spenders on traditional capex, which could be an area of cost savings for the combined company.

Intangible-Adjusted Investment Profile

SABMiller - Anheuser-Busch InBev

The balance sheet of Anheuser-Busch InBev is composed of slightly more intangible assets than what is on SABMiller’s balance sheet. Anheuser-Busch InBev has 4.7% of its assets in intangible assets while SABMiller has 3.4% of its assets in intangible assets. Both companies are solid financial condition. SABMiller has net debt as % of capital of only 24.9% and Anheuser-Busch InBev as net debt as % of capital of 33.3%

Intangible-Adjusted Balance Sheet

SABMiller - Anheuser-Busch InBev

SABMiller - Anheuser-Busch InBev

Both companies are two of the most profitable and efficient companies in the sub-industry. Anheuser-Busch InBev has the highest gross margins at 58.1% and SABMiller has the third highest gross margins at 50%. They account for the two highest EBITDA margins by a decently wide margin and both companies manage to squeeze out a 21% net profit margin as the rest of the sub-industry only manages to average a 6% profit margin. Anheuser-Busch InBev and SABMiller’s employees are the most productive in the sub-industry according to earnings per employee.

Intangible-Adjusted Operating Profile

SABMiller - Anheuser-Busch InBev

SABMiller - Anheuser-Busch InBev

These two companies are also great churning out cash flow. They have the second and third best operating cash flow margin as well as the second and third best free cash flow margin in the sub-industry. They use their cash flow to reward shareholders. They have the highest and second highest equity payout ratio in the sub-industry at 40% for Anheuser-Busch InBev and 29% for SABMiller, respectively.

Intangible-Adjusted Cash Flow Profile

SABMiller - Anheuser-Busch InBev

Finally, they both utilize their capital more productively than their competitors. They have the highest ROE and ROIC in the sub-industry.

Intangible-Adjusted Profitability Profile

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From an intangible-adjusted perspective, the combined entity of SABMiller and Anheuser-Busch InBev looks to be on very solid footing to continue to gain market share in the brewer sub-industry.