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AB InBev – SABMiller deal could brew skunky debt

September 15, 2014, 8:22 PM UTC
Anheuser-Busch InBev Brewery
A Budweiser tractor trailer truck waits to be loaded at the Anheuser-Busch InBev NV Fairfield brewery in Fairfield, California, U.S., on Monday, Nov. 8, 2010. The Anheuser-Busch InBev brewery ships approximately 50 trucks per day and 65 railcars per week to seven states, including Alaska, Hawaii, Northern Idaho, Northern Nevada, Northern California, Oregon and Washington. Photographer: Ken James/Bloomberg via Getty Images
Photograph by Ken James — Bloomberg via Getty Images

The latest beer deal may finally cause Wall Street debt buyers to close their tabs.

The world’s largest brewer Anheuser-Busch InBev (BUD) is reportedly seeking financing for a $122 billion buyout of its closest rival, No. 2 beer seller SABMiller. A deal between the two has been the subject of speculation for some time, and it would only be the latest combination in a long string of such tie-ups in the beer business.

In 2008, InBev bought Anheuser-Busch to create AB InBev. The combined company completed an acquisition of Mexican brewer Grupo Modelo last year. SABMiller (SBMRY) was created in 2003 through the merger of South African Brewers and Miller, which was owned by Altria (MO). SABMiller bought Australia’s Fosters in late 2011. SABMiller has been pursuing a takeover of Heineken. The Belgium brewer rejected SABMiller’s offer over the weekend.

All of those deals have left the beer market with a big debt hangover. This deal looks like it will only add to the pain.

AB InBev already has $39 billion in net debt, up $6 billion in the past six months. SABMiller has $15 billion in long-term debt, but it has done a better job of whittling down that from a high of over $20 billion just after the Foster’s acquisition.

No one has reported just how much additional debt AB InBev is looking to add to finance the SABMiller deal, but AB InBev has typically used a fair amount of debt in its acquisitions. One of the largest shareholders of AB InBev, Brazilian investment firm 3G, is known for aggressive cost-cutting (see Heinz) and for piling on debt with acquisitions. The firm is also the largest shareholder of Burger King (BKW), which recently proposed to be taken over by Canadian doughnut chain Tim Horton’s. In that deal, part of the financing is coming from Berkshire Hathaway’s Warren Buffett.

When InBev bought Anheuser-Busch in 2008, the deal added $45 billion in debt, about 87% of Anheuser’s $52 billion price tag. The debt market has been pretty open to deals lately. Still, AB InBev is unlikely to convince bankers or debt buyers to pony up anywhere near that much for SABMiller.

Combined, the two companies, AB InBev and SABMiller, are expected to have cash flow of $26 billion next year. That means, without any additional debt, the combined company would have a net-debt-to-ebitda ratio of 2.1. AB InBev has been promising shareholders it would cut that debt ratio to 2. Instead, if AB InBev were to finance the SABMiller deal with 50% debt, it would take its net debt up to $114 billion, and its debt ratio to 4.4.

That would give AB InBev one of the highest debt-to-cashflow ratios in the booze business. Rival Molson Coors (TAP) has a debt to equity of 4. But that company has just $4.8 billion in long-term debt. Distiller Brown Forman’s debt ratio is 1.2.

Constellation Brands (STZ), which owns Corona and the Mondavi winery among other brands, has a higher debt ratio of 6. But it too has been criticized for its acquisition strategy.

Investors are typically fine with high debt ratios in businesses that have consistent earnings. And the alcohol business would seem to fit that category. But AB InBev’s $91 billion in acquisitions over the past decade has made its earnings bumpy. Earnings were up last year, but analysts expect it to slow. And that’s made some nervous about the additional debt the deal could add. Fitch has already announced that it would likely downgrade AB InBev to “weak investment grade territory” if it went ahead with the SABMiller acquisition. Don’t be surprised if debt buyers say it’s last call for beer deals.