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Compania Cervecerias Unidas, Beer Sector -- >>> Another

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gfp927z   Thursday, 05/09/13 10:47:06 PM
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Compania Cervecerias Unidas, Beer Sector -- >>> Another M&A Candidate: Beer

By Federico Zaldua

May 8, 2013

Tickers: BUD, CCU, SAB


The beer industry, as a part of the consumer goods industry, has a tendency towards consolidation. The reason is simple: the more share of the market a company owns, the lower its fixed costs per unit of volume sold are. Hence, your margins soar as your share of the market increases.

AB InBev (NYSE: BUD) and its owners (the Brazilian trio led by Jorge Paulo Leman) know this very well. They have consolidated the industry while making their company's margins increase for over twenty years. AB InBev is the masters of the universe in the art of cutting costs and gaining market share through acquisitions. Still, there are some markets where they do not rule. Some of those markets are dominated by their biggest competitor, SABMiller (LSE: SAB), and others are ruled by independent local companies. This companies are prone to being acquired by giants such as AB InBev or SAB Miller. Let's take a look at a company that will surely be acquired at some point in time.

I think might be the giant's next target

Compania Cervecerias Unidas (NYSE: CCU) is the company that practically owns the beer market in Chile (its market share is above 90%). Besides this, the company also enjoys a 23% market share in Argentina, its second biggest market by volume. The company is efficiently managed and could provide AB InBev or SABMiller with one market that they cannot access on their own (barriers to entry are huge when a player has such a high share of the market). The deal could actually make more sense for SABMiller since the company doesn't have a sizable business in Argentina, where AB InBev rules the beer business with a +75% market share.

CCU (as the company is known in its country) is doing great. During the first quarter, volumes went up 9.7% Year over Year (YoY), and 3.0% YoY excluding the acquisition of Manantial in Chile and Uruguay (soft drinks). Moreover, consolidated revenues increased 8% YoY due to higher volumes, but with 1.5% lower average prices YoY.

Most importantly, trading at 2013 17.5x P/E and 9.2x EV/EBITDA, the company doesn't seem awfully expensive. AB InBev trades at 2013 12.9x EV/EBITDA, while SABMiller trades at an expected 15.4x EV/EBITDA.

I think CCU is a great target for bigger brewers looking to gain new monopolies: it trades at reasonable multiples and it would give those beer giants the possibility of selling parts of the company they might not want (such as the wine division CCU controls). Across Latin America, AB InBev and SABMiller have been distributing different markets between themselves. While Colombia and Peru are almost completely controlled by SABMiller, Argentina, Bolivia, Uruguay and Paraguay belong to AB InBev. Chile is the only market within the region that these two giants cant control. I would make a bet that it will not be long until one of these two cash-rich global brewers make a compelling offer for CCU. After all, interest rates will not stay at zero forever, and cheap long term financing is always key for any multi-billion dollar deal (CCU's current market capitalization is $5.3 billion).


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