Post date: 01/22/2014 - 16:34
A-B InBev BonusesWith St. John's still on strike and the American Teamsters into bargaining I am sure that both are hearing how hard done by the company is and how they need to cut costs. This is an interesting story.
With St. John's still on strike and the American Teamsters into bargaining I am sure that both are hearing how hard done by the company is and how they need to cut costs. This is an interesting story.
Anheuser-Busch InBev’s (ABI) efforts to buy back a Korean brewing subsidiary it flogged to KKR, a private-equity firm, in 2009. Or, rather, we used the deal as an excuse to examine ABI’s gigantic $2.5 billion bonus package for its 40 most senior executives. The payouts were unlocked in part by the disposal programme, one element of which is now being reversed.
The Korean deal is now confirmed. It is even pricier than the $4 billion that we had expected: ABI will pay a whopping $5.8 billion, or more than three times the $1.8 billion it sold out for in 2009, to reacquire Oriental Brewery, reuniting the Cass brand with Budweiser and Beck’s.
The price tag is higher mainly because Oriental has grown faster than anyone forecast in its time away from ABI. That matters because ABI had an option to reverse the 2009 sale if it paid 11 times Oriental’s profits (more precisely, its earnings before interest, tax, depreciation and amortisation, or ebitda). It looks like it is paying slightly more than that, as Oriental’s ebitda is now “approximately $500m”, according to ABI. The slight mark-up may be explained by currency factors, or because the deal is happening slightly sooner than the start of ABI’s repurchase option period, in July. An ebitda multiple of 11 times is still a pretty good deal, mind you, as brewery assets tend to go for a bit more and Korea is a rare example of a rich country where beer volumes are still going up.
At first glance it looks like an extraordinary deal for KKR, even though it sold off half its stake to a local rival soon after its 2009 acquisition. It has reportedly made five-fold its $750m original investment (the rest of the money used to buy Oriental would have been borrowed). A buy-out deal that makes two-times return is considered pretty good these days; five-fold is superlatively good, especially for a stable asset like an established brewery. Making five times your money in five years equates to 38% annual returns, by the way.
All this suggests one of four things, none of which reflects well on ABI’s bosses. The first is that they sold Oriental for too little in 2009, given that there was clear potential to increase profits in a relatively short space of time. The second is that there were lots of obvious things Oriental’s owners could do to boost profits, which ABI didn’t do prior to 2009, which doesn't serve shareholders' interests. The third is that private-equity buyers with no real brewing experience can do at least as good a job as ABI when it comes to running a beer business—even though they didn’t have the economies of scale that Oriental would have by being inside ABI. The fourth is that ABI was happy enough to borrow at what is in effect a 38% interest rate, given how stretched its balance sheet was in 2009.
KKR and its investors undoubtedly deserve the riches that will befall them. They have taken a risk with their own cash and increased the size of a business at double-quick pace. In the meantime, ABI’s managers, who haven’t invested their own money, will share an extra $2.5 billion in bonuses, including nearly $300m for Carlos Brito, the company's boss.
Back of the beermat calculations suggest that just the share price bump from Monday morning will give each of the 40 senior executives a $367,000 windfall, and Mr Brito an extra $1.7m.