Barbarians at the Bar

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The title is inspired by the book that made private equity firm KKR famous. I am using this title to offer you the story of two companies that grew through a long stream of successful private equity-style acquisitions. This pair are champions at cutting costs and delivering synergies for shareholders. Besides, both operate in the alcohol business, where distribution is the main barrier to entry, so they are fully aware that they need to keep their share of the market high in order to maintain their low fixed cost per hectoliter.

Now, even if the market loves them, could they still represent an opportunity? What's the right price to buy at?

AB-InBev (NYSE: BUD) is the world's biggest brewer, and it has the best possible management that any shareholder could dream of. The company is controlled by billionaire Brazilian families Lemann, Sicupira, and Telles. After selling Banco du Garantia, this business trio bought Brazilian brewer Brahma and later on they bought their bigger competitor, Antartica. The merged company took the name of AmBev (NYSE: ABV) which continued its expansion buying Argentina's Quilmes, which enjoyed multiple monopolies across different South American countries (Uruguay, Paraguay, Bolivia). Right now AmBev, which is 62% owned by BUD, controls nearly 80% of the Argentinean market and more than 70% of the huge Brazilian beer market

Later on, ABV merged with Interbrew to form InBev, and in 2008 InBev bought Anheuser Busch for $52 billion to form AB-InBev. The history of this amazing Brazilian-led management is one of buying in moments of distress at great prices and cutting costs to improve margins. AB-InBev has a had tremendous success de-levering its balance sheet since Anheuser Busch's acquisition and now, when the company was approaching its x2 debt to EBITDA target, BUD announced the acquisition of Grupo Modelo (where they expect to deliver $800 million in synergies). It seems there are no barriers for this giant.

Year to date the stock has soared 40% and now its trading at x9 2013 EV/EBITDA and x16 2013 P/E. With its near monopolistic market positions in Brazil, Argentina, Mexico, and with its over 40% market share in the US plus its 39% EBITDA margin, if you ever see BUD at a price below $80, go long!

Diageo (NYSE: DEO) was born in 1997 from the merger of Guinness and Gran Metropolitan ,and now is the king of spirits. DEO owns Smirnoff, Bailey's, and Johnnie Walker, among many other brands. The company has been acquiring companies all over the world to consolidate its powerful franchises. As a clear example of this, this year DEO acquired 53% of United Spirits (paying a x20 P/E multiple) in order to gain access to the Indian market (growing at a 15% year over year rate). DEO will continue pursuing deals that bring either great distribution networks or great brands such as Jose Cuervo, which is the family-owned Tequila company that DEO has been trying to acquire for some time.

DEO has an outstanding operating profit margin of around 30%, emerging markets account for over 40% of its business, revenues grow at a 6% year over year, and it generates $2.6 billion in free cash flow every year. At a current market capitalization of $73.7 billion, the company trades at x18 2013 P/E. I would wait for DEO's share to go below $110. If it does, then buy this company as fast as you can.

These two great companies are cash flow machines that are going to save money for you. They both have wonderful businesses with huge barriers to entry and great management. For now you are getting a low dividend yield (below 3% in both cases), but poised to grow on time (DEO plans to increase dividends at a rate of 8%). If you find the right price don't hesitate and go long. These are real investments you won''t regret, but the right entry price is the key for success.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Diageo plc (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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