Carlos Brito is paying through the nose for Modelo. The AB InBev boss is drawing a cool $20-billion (U.S.) from the keg to acquire the half of the Mexican brewer he doesn’t already own. Gulping down the maker of Corona and Negra Modelo makes strategic sense. But to justify the whopping 53 per cent premium he’s paying, Mr. Brito is going to need to brew up more than the $600-million of synergies he’s promising.
Once taxed, discounted for the four years it’ll take for them to ferment, and capitalized, those cost savings are currently worth $3.6-billion to shareholders. That only covers half the premium Mr. Brito is offering. The good news for investors is that Mr. Brito has an excellent track record of getting the most he can out of his suds deals. In the 2008 takeover of Anheuser-Busch, for example, he promised to find $1.4-billion of annual cost synergies by 2011. He ended up getting 51 per cent more than that.
Let’s assume he can pull the same trick with Modelo, even though there’s less overlap in this deal. It would bump up the current value of the savings to $5.4-billion, but that is still $1.7-billion shy of the premium. Mr. Brito reckons the combined company can find “significant revenue synergies.”
Meanwhile, AB InBev is already watering down the numbers to make the purchase price look less heady. Its calculations value Modelo at 12.9 times this year’s estimated $2.5-billion of EBITDA. That’s based on valuing the 50 per cent stake it already owns in Modelo at $13-billion and leaves the multiple not ridiculously out of whack with the average of 12.3 times historic EBITDA paid for beer deals since 2009, according to UBS. But this transaction sees AB InBev buying half the company, and thus only half the EBITDA. Looked at that way, the multiple jumps up to about 17 times. Fold in the synergies and it falls to 13.3 times EBITDA, though that also includes the $1.85-billion AB InBev is getting from selling its stake in U.S. distributor Crown. But that is still some way over AB InBev’s touted with-synergies 10.8 times multiple.
That’s misleading and unnecessary. If anyone has the wherewithal to make such a deal work financially, it’s Mr. Brito. It’ll be a stretch, but massaging the numbers won’t help his cause.