24/7 Wall St. 2007 Break-Up Values: Anheuser-Busch $56 (Current Price $50.25)

Anheuser-Busch (BUD) – Price $50.25; Break-up Value $56

Anheuser-Busch has already won the battle to be the largest beer company in the world, hands down.  Sales in North America have been essentially flat for several years, but the company is so efficient in its operational structure and distribution network that it can turn a 2% sales increase into 4-5% earnings growth, and that’s just in the American operations. 

Because nobody can compete with them in distribution, Anheuser has taken to a new strategy of signing deals with importers to have exclusive distribution rights to higher-margin beers like Beck’s, Bass Ale, and even Hansen’s (HANS) energy drinks.  As to how well BUD can translate this to earnings growth, only time will tell.  What is safe to say is that most investors own the company for its well-oiled cash production, and not its theme parks and small packaging & recycling unit.  Domestic beer still leads the company in operating margins, and if they can generate a few extra points of margin by selling premium products through the pipeline, so be it. 

The main point here is that Anheuser-Busch has limited break-up options.  The value of the company is in its scale and size.  None of their competitors come even close in terms of efficiency, and this gives BUD both pricing power (or at least “price safety”) and cash flow stability like few companies can match.  In our break-up study here all we can do is put a price tag on the “ancillary” segments, value the equity stakes in Grupo Modelo and Tsingtao, and keep the same relative valuation on the Domestic and International beer operations. 

To that end, the Entertainment business (Busch Gardens and Sea World), which is run much better than Six Flags but not as well as Cedar (FUN), could be sold for 1.7x sales, or $2 billion.  The packaging business is low margin, and only worth 4-5x operating earnings, or about $700m total.  The 27% stake in Tsingtao brewery and the 50% stake in G. Modelo are both worth on the high end of industry multiples at 2.2x sales, providing values of $830m and $4b, respectively. 

The proceeds of these sales could pare down the company’s roughly $7b in long-term debt or buy back shares, either of which would give shareholders a lift, but as for valuation we’re just going to keep it the same for the sake of conservatism, and look to see if the import distribution strategy proves profitable.  The total breakup value in this scenario comes to $56/share.

Ryan Barnes

Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others.  Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.

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