Burdened by extraordinary amounts of debt — and engaged in a battle against craft beers — Budweiser is currently taking aggressive action to deleverage itself.
Following the acquisition of SABMiller, Budweiser is over $100 billion in debt, and it hasn’t been able to cut that debt as quickly as expected. Beer profits, in general, are falling, and beer companies are going to need to adjust to the new reality of the market.
Is there a clean way for one of the most-recognized big beer brands to recover? Let’s take a look at the facts.
America Switching to Craft Beer — or NO Beer
In the last decade, the American market has experienced a renewed interest in craft beer, which has cut the profits for mass market beers considerably. In the interest of moving away from America, Budweiser purchased SABMiller, and attempted to expand into African markets. Despite this move, Budweiser hasn’t been able to build its profit enough to clear its debt.
Interest in mass market beer is waning in many countries, with independent breweries gaining favor. Moreover, drinking is down in general: millennials either drink very sparingly or are abstinent. Alcohol-free alternatives are growing in popularity, and coffee and tea shops are expanding. Drinking at night to socialize is also becoming less popular, and many are instead choosing to focus on experiences.
With all of this in mind, beer companies are going to have to find new ways to appeal to more health-conscious customers who have a broader variety of options.
Budweiser Takes Action to Deleverage
Budweiser is taking a few important actions to reduce its debt:
- It’s cut its dividends in half, reducing its costs by $4 billion.
- It’s sold its Australian business for $11.3 billion.
- It considered an IPO for its division in the Asia-Pacific region.
But that alone may not be enough. With such extreme amounts of debt, Budweiser may be particularly vulnerable if there is an economic downturn, or if — as many in the industry fear — beer drinking continues to slow down.
That being said, analysts aren’t worried that Budweiser will be rendered unable to pay its debts. Budweiser still produces a substantial profit every year, even during the decline. A concern is that Budweiser may not have the cash or liquidity to adapt to these new and emerging markets, which require beer companies to be a little more agile.
Budweiser’s Canceled Asia-Pacific IPO
Earlier in the year, Budweiser considered an IPO of Budweiser Brewing Company APAC, which would have raised an estimated $9.8 billion for the company. However, the company canceled the IPO early in July, likely due to market concerns. Asian stock markets have been particularly volatile, and with the global economic forecasts uncertain, entering into a large IPO could carry with it some risk.
This doesn’t mean that an IPO may not be coming in the future, though. Budweiser has considered it, which means it may consider it again when the economy is more certain. If the IPO does move to market, it will be one of the most substantial IPOs available. It will likely lure in a substantial number of investors, who trust in Budweiser as a company with longevity.
Budweiser Remains Recession Proof
For many businesses right now, an upcoming recession is of great concern. Over-leveraged businesses tend to falter (or even close entirely) during recessions, as they don’t have the liquidity to continue their operations. This isn’t a concern that Budweiser shares.
Budweiser is in a recession proof industry. Beer and other cheap liquors generally don’t go down in sales due to tightened economies. Instead, historically, during recessions people drink just as much if not more. Drinking is one of the more affordable options for entertainment, even if it’s a luxury.
In fact, a recession could cause consumers to move away from expensive craft beers and towards inexpensive, grocery store staples. It’s difficult to say, as craft beers were not a large part of the market during prior recessions.
What does it mean for investors now? Budweiser’s dividends are likely to be light for a while, and while the company isn’t exactly struggling, it’s highly leveraged and profits are falling. There are many opportunities within the craft beer market right now, but mainstream beer products are suffering — and they may have a way to go if they want to recapture their hold on the market.
Regards,
Ethan Warrick
Editor
Wealth Authority
