In the past few years, the alcoholic beverage industry has undergone massive consolidation. Whilst huge companies with big emerging market exposure were being formed, such as SABMiller or Anheuser-Busch InBev , Molson Coors Brewing Company was divesting itself of its international exposure selling its Brazilian beer business, Kaiser. Molson Coors has suffered from this reliance on mature markets and investors have rewarded it with a 12x earnings multiple compared to the far more generous 21x for Anheuser-Busch InBev, for example. Does this pessimism represent opportunity for the long-term investor?
The first question to ask is what have TAP’s operating returns been over the past ten years? We can see that returns on operating assets are towards the bottom end of the past ten years but profits have increased dramatically in absolute terms. To get a clearer picture we have to break the return on operating assets down further to see what margins TAP is making and how it is using its assets.
Whilst operating margins have improved any benefit from this has been canceled out as the company has achieved lower and lower sales per unit of operating assets. In 2002, TAP had sales that were 2.59x operating assets but by 2011, this had dropped to 0.51x. To put this in more understandable terms, whilst net operating assets have increased by around $7bn since 2002, sales have only increased by $1.3bn. The main reason for this was the 2005 merger between Molson and Coors which added about $5bn to the goodwill line. The company has made good investments outside of goodwill and the operating performance net of intangibles has improved from around 6% in 2002 to 16% in the LFY with a high of 35% in 2006. Due to the effect of the JV, of which more will be said later, we know that this problem with operating assets is somewhat overstated as the income statement no longer includes US sales however, the conclusion at this stage is that the merger really didn’t work out as expected.
So what will TAP be facing in the future? As mentioned already, the most important dynamic in the alcoholic beverage industry has been consolidation. In the 2001-2010 period, the combined share of the world’s largest 10 brewers increased by 22 percentage points to 61% and this increase was achieved, mostly, through M&A. Consolidation,…
