Brand Finance report: AB InBev’s $71 billion hangover

The following analysis was sent along by Brand Finance, a brand valuation and strategy consultancy.

It is one of the biggest deals of the year and has sent shock waves through the brewing industry. The announced acquisition price of $107 billion paid by AB InBev for SABMiller implies a colossal value of $120 billion when debt is accounted for. Just $13 billion of this is made up of tangible assets such as property, plant, machinery. The remaining $107 billion is composed entirely of intangible assets (formulas, recipes, customer relationships, Goodwill and brands) which constitute 89 percent of the value.

Brand Finance has examined this massive intangible asset value. Using widely accepted valuation techniques (mirroring AB InBev’s own accounting policies) Brand Finance has estimated the split of different intangible asset types. Brands, as defined by AB InBev, constitute $32 billion of the total. Other specific identifiable intangibles, such as software, account for approximately $4 billion. The remainder or “hangover” comes in the form of Residual Goodwill. Goodwill is defined very broadly by AB InBev in its accounting policies and at US$71 billion, Brand Finance’s calculations indicate that it represents 67 percent of the total intangible asset value and 59 percent of the total implied value.

Ab InBev will no doubt be more than pleased at the success of the deal but will have to extract huge post acquisition synergies to justify the extraordinary Goodwill figure. It is looking to do just that, targeting savings of $1.4 billion on top of the $1 billion annual savings reported by Alan Clark to SABMiller’s investors last month. This has further alarmed those concerned about the impact on employees and consumers of the deal. AB InBev is by far the most profitable of the major brewers with an operating margin of 32 percent compared to SABMiller, Heineken and Carlsberg’s margins of 20, 14 and 12 percent respectively. Such savings may justify the Goodwill figure in the end, at least to AB InBev’s shareholders.

David Haigh CEO of Brand Finance said: “With this deal AB InBev has created a huge Goodwill figure in its balance sheet. It has no doubt created huge seasonal Goodwill with the happy shareholders at SAB Miller. For them Christmas has come early this year!”

SABMiller, key figures:

Element		Value (US$bn)
Purchase Price		107
Debt		13
Implied Total Value		120
Tangible Assets		13
Intangible Assets		107
Intangible Asset Split	Goodwill	71
	Brands	32
	Other Intangible Assets	4
Total		120

Brand Finance’s analysis also reveals a number of other significant trends. The first is the importance of localism to the beer industry. Big beer is facing an ever more pressing threat from locally based craft brewers that are growing rapidly. This is reflected in SABMiller’s brand portfolio. It includes more than 100 brands but only three (Peroni, Pilsner Urquell and Grolsch) are global and account for just 10 percent of the total brand value.This percentage would be higher, however, a regulatory condition of the deal was that SABMiller sell its 58 percent stake in MillerCoors, meaning that AB InBev will not take ownership of Miller, which had been SAB’s most valuable brand. Haigh commented: “Probably the most important point is that the figures highlight the significance of intangible assets to beer companies.

The return to SAB Miller shareholders over the last 15 years has been huge, driven by huge growth in the value of its intangible assets. The deal is predicted to presage further consolidation in the industry. Those acquiring should carefully examine the value of their target’s assets to avoid overpaying, those being acquired should do the same — undervaluation of assets such as brands could lead to lost revenue, an inability to fend off hostile takeovers and hence consolidation that may lead to job losses.”