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AB InBev’s $71 Billion Hangover

23 November 2015
This article is more than 5 years old.

It is one of the biggest deals of the year and has sent shockwaves through the brewing industry. The announced acquisition price of US$107 billion paid by AB InBev for SABMiller implies a colossal value of US$120 billion when debt is accounted for. Just US$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% of the value.

Leading brand valuation and strategy firm 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 US$32 billion of the total. Other specific identifiable intangibles, such as software, account for approximately US$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% of the total intangible asset value and 59% 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% compared to SABMiller, Heineken and Carlsberg’s margins of 20%, 14% and 12% respectively. Such savings may justify the Goodwill figure in the end, at least to AB InBev’s shareholders.

David Haigh CEO of Brand Finance plc says ‘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!’

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 SAB Miller’s brand portfolio. It includes more than 100 brands but only three (Peroni, Pilsner Urquell and Grolsch) are global and account for just 10% of the total brand value.

This percentage would be higher, however a regulatory condition of the deal was that SABMiller sell its 58% stake in MillerCoors, meaning that AB InBev will not take ownership of Miller, which had been SAB’s most valuable brand.

David Haigh continues, “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.”

ENDS

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Konrad Jagodzinski
Konrad Jagodzinski
Communications Director
Brand Finance
Florina Cormack-Loyd
Florina Cormack-Loyd
Senior Communications Manager
Brand Finance

About Brand Finance

Brand Finance is the world’s leading brand valuation consultancy. Bridging the gap between marketing and finance, Brand Finance evaluates the strength of brands and quantifies their financial value to help organisations of all kinds make strategic decisions.

Headquartered in London, Brand Finance has offices in over 20 countries, offering services on all continents. Every year, Brand Finance conducts more than 5,000 brand valuations, supported by original market research, and publishes nearly 100 reports which rank brands across all sectors and countries.

Brand Finance is a regulated accountancy firm, leading the standardisation of the brand valuation industry. Brand Finance was the first to be certified by independent auditors as compliant with both ISO 10668 and ISO 20671, and has received the official endorsement of the Marketing Accountability Standards Board (MASB) in the United States.

Methodology

Definition of Brand

Brand is defined as a marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos, and designs, intended to identify goods, services, or entities, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits.

Brand Strength

Brand strength is the efficacy of a brand’s performance on intangible measures relative to its competitors. Brand Finance evaluates brand strength in a process compliant with ISO 20671, looking at Marketing Investment, Stakeholder Equity, and the impact of those on Business Performance. The data used is derived from Brand Finance’s proprietary market research programme and from publicly available sources.

Each brand is assigned a Brand Strength Index (BSI) score out of 100, which feeds into the brand value calculation. Based on the score, each brand is assigned a corresponding Brand Rating up to AAA+ in a format similar to a credit rating.

Brand Valuation Approach

Brand Finance calculates the values of brands in its rankings using the Royalty Relief approach – a brand valuation method compliant with the industry standards set in ISO 10668. It involves estimating the likely future revenues that are attributable to a brand by calculating a royalty rate that would be charged for its use, to arrive at a ‘brand value’ understood as a net economic benefit that a brand owner would achieve by licensing the brand in the open market.

The steps in this process are as follows:

1 Calculate brand strength using a balanced scorecard of metrics assessing Marketing Investment, Stakeholder Equity, and Business Performance. Brand strength is expressed as a Brand Strength Index (BSI) score on a scale of 0 to 100.

2 Determine royalty range for each industry, reflecting the importance of brand to purchasing decisions. In luxury, the maximum percentage is high, while in extractive industry, where goods are often commoditised, it is lower. This is done by reviewing comparable licensing agreements sourced from Brand Finance’s extensive database.

3 Calculate royalty rate. The BSI score is applied to the royalty range to arrive at a royalty rate. For example, if the royalty range in a sector is 0-5% and a brand has a BSI score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4%.

4 Determine brand-specific revenues by estimating a proportion of parent company revenues attributable to a brand.

5 Determine forecast revenues using a function of historic revenues, equity analyst forecasts, and economic growth rates.

6 Apply the royalty rate to the forecast revenues to derive brand revenues.

7 Discount post-tax brand revenues to a net present value which equals the brand value.

Disclaimer

Brand Finance has produced this study with an independent and unbiased analysis. The values derived and opinions presented in this study are based on publicly available information and certain assumptions that Brand Finance used where such data was deficient or unclear. Brand Finance accepts no responsibility and will not be liable in the event that the publicly available information relied upon is subsequently found to be inaccurate. The opinions and financial analysis expressed in the study are not to be construed as providing investment or business advice. Brand Finance does not intend the study to be relied upon for any reason and excludes all liability to any body, government, or organisation.

The data presented in this study form part of Brand Finance's proprietary database, are provided for the benefit of the media, and are not to be used in part or in full for any commercial or technical purpose without written permission from Brand Finance.

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