Japan & Australia: Asahi already getting headache from its Australian expansion

Asahi Group Holdings Ltd. is already getting a headache from its $11 billion Australian foray, Bloomberg reported on July 22.

Japan’s biggest brewer, seeking to escape a slow-growing, aging market at home, is buying the Australian assets of Anheuser-Busch InBev NV, which owns iconic but low-priced beers such as Victoria Bitter. To do so, Asahi will double its debt load and issue about 10% more in new shares. That’s becoming a hangover for investors, who lopped $2 billion from the brewer’s market value on July 22.

The deal is the latest in an overseas buying spree by Asahi, which picked up Fuller, Smith & Turner Plc’s brewing business for $330 million earlier this year and made an $11 billion push into Europe two years ago. The Japanese brewer, along with Kirin Holdings Co. and Sapporo Holdings Ltd., has seen domestic beer shipments decline for 14 straight years as fewer people reach legal drinking age. To stay ahead of rivals, Asahi now appears to be more willing to weigh down its balance sheet.

“The question is whether Asahi can effectively manage the business, while improving profits and cash flows,” said Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Group Inc., who added that Asahi’s credit profile will be hurt as debt grows faster than cash flow. “Can they generate synergies, and can they improve their financials after the deal?”

Shares of Asahi dropped 8.9% in Tokyo trading on July 22, the biggest decline since 2011. The stock was up 18% this year before the deal with AB InBev was announced on July 19.

Asahi said it’s securing a 1.2 trillion yen ($11.1 billion) bridge loan and selling 200 billion yen worth of shares to pay for AB InBev’s Melbourne-based Carlton & United Breweries. The Japanese brewer is already on the hook for about 1 trillion yen in interest-bearing debt. The company is betting that cash from the Australian business will help pay down debt. The purchase may lift Asahi’s per-share earnings by as much as 20%, according to SMBC Nikko Securities.

There are already early signs of concern over Asahi’s creditworthiness. Moody’s Japan placed the company’s ratings on review for downgrade on July 22, saying the deal will “significantly raise Asahi’s financial leverage.” Rating & Investment Information Inc. said it would place the brewer on its rating monitor with a view to downgrading.

A representative for Tokyo-based Asahi declined to comment on July 22.

The timing of Asahi’s 200 billion yen share sale isn’t ideal, either. That figure represents about a fifth of total equity issued in Japan this year. Companies have issued 1.1 trillion yen of stock so far, down 43% from the same period last year, according to data compiled by Bloomberg.

Asahi has been here before. In 2016, it agreed to buy European beers including Peroni, Grolsch and Pilsner Urquell in two transactions from AB InBev for about $11 billion. Since then, the Japanese brewer’s shares have climbed more than 30%, making it easier for Chief Executive Officer Akiyoshi Koji to justify the latest deal to shareholders.

Asahi said the Carlton purchase would give it greater access to distribution across the Australian market, letting it cross-sell its own brands, including Super Dry and Peroni. “Australia is an attractive market enjoying sustainable economic growth,” the brewer said in a statement.

Tomonobu Tsunoyama, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, agreed. “It’s a mature market, but in terms of making money from premium brands, Australia is very similar to Eastern Europe,” he said.

Even so, total beer consumption in Australia has more than halved in the past four decades, to 84 litres per person a year, while lower-alcohol brews make up one fifth of the total. With total alcohol consumption declining, InBev had been pushing weaker ales on Australians.

“The Australian market is very high margin, but very slow growth,” said Duncan Fox, a Bloomberg Intelligence analyst.

Carlton’s portfolio of beers, which account for almost half the Australian market, has something for almost any palate. The collection is built on the 165-year-old Victoria Bitter, still portrayed as the brew of choice for hot and thirsty Aussie laborers, but also includes foreign brands such as Stella Artois and Beck’s. InBev has in recent years added craft beers including 4 Pines, which is made in the Sydney beachside suburb of Manly.

Although Carlton fits with Asahi’s long-term strategy, it’s unlikely to deliver benefits beyond the continent, according to Naomi Takagi, an analyst at SMBC Nikko Securities.

“The deal is unlikely to lead to expansion in other countries and thus synergies look thin,” Takagi wrote in a research note.

23 July, 2019