What should Consumer Goods Companies (CGCs) be worth? According to the last deals on the street, CGCs with high shares of their respective markets are worth much more than what they used to. Just a few days ago, Anheuser Busch InBev (BUD) - which is held by Wallace Weitz (Trades, Portfolio) - just paid three times the money it had gotten in 2009 when it initially sold Oriental Brewery to Kohlberg Kravis Roberts & Co. (KKR). Another (this time very) pricy CGC deal was also executed a few days ago: Suntory Holdings paid $16 billion, or almost 21 times EBITDA, for spirits maker Beam (BEAM) – which is held by Ray Dalio (Trades, Portfolio).
As I mentioned above, the almighty beer world leader AB InBev paid a hefty price to control one of Korea’s big two brewers again. AB InBev paid $5.8 billion, or 11 times trailing EBITDA – which doubled under KKR's management period – in order to regain its ownership of Oriental Brewery. Five years ago, AB InBev sold the company for “just” seven times EBITDA, or around $2 billion. Even when its true that those times were very different – the world economy was already in crisis and AB InBev needed to reduce its debt load down to its 2.5 times EBITDA target after the $52 billion acquisition of Anheuser Busch – its also true that the average multiple for acquisitions has expanded very aggressively.
The acquisition of Beam by Suntury has been still more aggressive than the deal just closed by AB InBev – usually, a very wise buyer. Even when the deal will transform the Japanese group (which is facing a shrinking home market) and interest rates are still near the zero lower bound, a multiple of almost 21 times EBITDA is tough to explain. Moreover, after the deal, Suntury shall emerge with net debt of about five times EBITDA and without many synergies to justify such a huge price tag.
A Pricy Sector but Some Opportunities May Arise
Consumer goods companies are great cash flow generators and usually their business motto (the barriers to entry that protect their businesses) is strong enough to protect those cash flows for an almost infinite amount of time. Hence, they rarely trade cheaply. Companies such as Diageo (DEO), which is the world leader in spirits, or AB InBev sell for a forward EV/EBITDA multiple of 14.6 and 12 times, respectively. Nevertheless, at those prices, all the future growth seems overly discounted. You should always remember that “price is what you pay and value is what you get.” In many cases, you might end up paying too much for a great asset the way Suntury just did.
If you want to get exposure into consumer goods right now, it's better to await for opportunities to arise rather than just buy at the currently high prices. One current opportunity seems to be Compania Cervecerias Unidas (CCU), a company which owns the Chilean beer and spirits market and trades at 7.3 times 2014 EV/EBITDA. In addition, the Chilean beer leader is a clear M&A candidate for its (much bigger) competitor, AmBev (ABEV), which trades at 13 times 2014 EV/EBITDA.
Long story short: CGCs look very expensive right now. If you want to get exposure to this sector, you should await for opportunities to arise. Compania Cervecerias Unidas is just one clear example of such rare opportunities.