This Beer Brewer is Set to Conquer Asia

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Introduction

In my last article on Heineken (NASDAQOTH: HEINY), I made the case that this beer titan had room to grow, especially in Asia. I mentioned the company’s planned takeover of Asian Pacific Breweries (APB), owner of popular Asian beer brands such as Tiger and Anchor. Now that Heineken has completed this takeover, I thought it may be time to reassess the company’s prospects, and what exactly this deal means for Heineken and its shareholders. It appears as if this acquisition will allow Heineken to position itself for strong growth across Asia, one of the world’s fastest growing beer markets.

Acquisition of APB

On Friday, the Dutch mega brewer completed the acquisition of the remainder of APB it did not yet own for the princely sum of 5 billion Euros. The deal is by far the largest in the company’s history, and has secured Heineken’s position as the world’s 3rd largest beer brewer (behind AB-Inbev (NYSE: BUD) and SABMiller. With a market share of 25% in the premium beer segment, Heineken (the drink, not the company) is also the world’s biggest luxury beer. Although the acquisition was pricey for Heineken, the company has over $2 billion in cash and was able to finance the takeover at less than 3% interest.

Although Heineken paid about 35 times current earnings for the Asian brewer, an extravagant multiple by any standard, CEO Jean-Francois van Boxmeer is convinced the deal was worth every penny for the strategic opportunities it presents. According to van Boxmeer, the deal will grant Heineken access to two of the world’s fastest growing beer markets: the Asia-Pacific region and China. With the deal, Heineken will now generate over 60% of sales volume from emerging markets, which shows the company’s dedication to moving beyond the saturated markets of Europe.

Valuation, Earnings and Risks

The news sent the stock price up in Europe, and as such it may be time to reconsider its current valuation. The stock now trades at 16.7x earnings, compared to the 19.5x earnings of rival AB-Inbev, owner of popular brands such as Budweiser in the US and Jupiler in Europe. Heineken has a decent return on equity of 16%, but a high price to book of 2.5. The company has an operating margin of about 12.8%, which is blown out of the water by AB-Inbev’s margin of over 30%. On the other hand, Heineken’s increasing exposure to emerging markets may give it some competitive advantages over AB-Inbev.  

Although prospects for the remainder of the year are quite strong, earnings over the first half were less than stellar, especially in Europe. Volume was down almost 3% in the region, while analysts expected a decrease of about 1.7%. On the other hand, emerging markets came in strong, with volume up 5.1% in Africa and the Middle East and 4.6% in Asia-Pacific. The main risks for Heineken are increasing saturation in Western markets, the consolidation of its main rivals AB-Inbev and SABMiller, and rising commodity costs.

Conclusion

All in all, I believe Heineken is well positioned for growth in the near future. The complete takeover of APB shows its commitment to growth in emerging markets and should allow it to solidify its position in the region. Based on fundamental valuations, the company isn’t too expensive at the moment, and the stock may be an interesting choice for those looking to profit from consumer spending in emerging markets as well as Europe and the United States. 


DUJames is long Heineken. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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