6. The 3G Model
6.5. Capital Structure
1.5 2.0 2.5 3.0
2011 2012 2013 2014 2015
Industry Revenue/PPE
AB InBev SAB Miller Carlsberg Heineken
Exhibit 33: Industry Revenue/PPE. Source: Bloomberg
1,535 2,160 2,691
5,076 4,559 3,078 4,780 3,848 13,585
25,151
29,713
5,142 4,618 4,613 5,027 6,009
13,655
25,230
32,404
0 10,000 20,000 30,000
2009 2010 2011 2012 2013 2014 2015 2016
Kraft Heinz Debt
ST Debt LT Debt Exhibit 34: Kraft Heinz Debt. Source: Bloomberg
48 Since 3G Capital acquired Heinz in April 2013 the company has added a massive amount of debt compared to the previous years. Just after the acquisition the value of debt more than doubled showing that the transaction was a leveraged one. On top of that debt, there was even more added once Kraft was acquired and merged with Heinz in 2015 to form Kraft Heinz. Kraft itself had approximately $8 BN of debt previous to the merger which put together with the Heinz debt would be approximately $21 BN debt for the combined company. However, in 2016 we see a debt value of $32 BN, $10 BN more than the combined debt of both companies. It can be stated that 3G Capital is accustomed to use debt as a mean to raise capital and buy out companies. As 3G have raised debt several times in past for similar transactions, they can get loans at a very low-interest rate due to the confidence the lenders have in them knowing they can fulfil the debt obligation.
On 2nd March 2017, AB InBev released their first Annual Report51 under the new structure, which includes the previous SAB Miller entity. As the merged company formed officially only in October 2016, the newly released annual report comprises of the Income Statement capturing the activity corresponding for the full year 2016 of AB InBev and the period between October to December for SAB Miller. The Balance Sheet, as it represents a snapshot of the company position at a single point in time, captures all the adjustment post-merger in terms of financial structure.
For our purposes, the Income Statement does not represent a point of interest, as it does not capture the activity for the full year 2016 for both companies. However, the Balance Sheet does represent a good source of information for adjusting the financial model to reflect better the reality.
The purpose of the next exercise is to compare the 2016 Balance Sheet from our financial model to the one from the Annual Report. The exercise will function as a sanity check for our model and will improve the accuracy of it.
The first step was to restate the reported Balance Sheet as we did previously for AB and SAB. We restated the Balance Sheet to indicate Net Operating Assets and Invested Capital. The step was necessary for a like to like the comparison with the balance sheet from the financial model. The same guiding principles were used into restating the Balance Sheet as before. For a full detailed view of the restated Balance Sheet, please refer to Appendix - AB InBev 2016 Balance Sheet (as reported).
Looking at the Invested Capital level, the two Balance Sheets show a significant difference. The Invested Capital for the 2016 reported Balance Sheet is $176,099 M. The Balance Sheet from our financial model
51 (AB InBev, 2016)
49 shows an Invested Capital of $128,085 M. The main difference between the two comes from the fact that our balance sheet does not count for the new financial structure of the company. The deal was financed with a high amount of debt, which is not captured in our model yet. To reflect better the reality, we will adjust the Long-term Debt in the financial model in order to match the one from the latest Annual Report.
In the same time, on the other side of the Balance Sheet, we will also adjust the Goodwill in order to have the Invested Capital match the Net Operating Assets.
In the financial model, we forecasted that at the end of 2016 AB had on the books a value of Long-term Debt of $43,541 M and SAB a value of $8,814 M, combined $52,355 M. The Annual Report shows a value of the Long-term Debt for the combined entity of $113,941 M. The difference between the value we
forecasted and the reported one is $61,586 M. In order to finance the deal, the company issued bonds worth 60,720 M in USD and EUR currencies (see Appendix – AB InBev Debt Maturity Profile). The difference between what we are missing on the Balance Sheet and what the company has issued is insignificant.
As a result, we will make an adjustment of $60,720 M to the value of the Long-term Debt in the financial model in order to reflect the reality. The details of the 60,720 M bond issuance are presented in Exhibit 35.
For a detailed debt repayment plan, refer to Appendix – Debt Repayment Schedule. The interest and principal payments related to the newly acquired debt are integrated into the financial model and follow the schedule presented in the Appendix – Debt Repayment Schedule. The principal amount is recorded on the Balance Sheet under Invested Capital as “LT Debt related to the 2016 merger”. It will be a separate line from the already present debt. The interest payments are integrated in the financial model on the Income Statement after NOPAT as a separate line, “Financial expenses related to the 2016 merger”.
Principal
Amount Currency Interest Rate Maturity Year
4,000 USD 1.900% 2019
1,750 EUR 0.625% 2020
1,250 EUR 3M EURIBOR + 75 bps 2020
7,500 USD 2.650% 2021
500 USD 3M LIBOR +126 bps 2021
2,000 EUR 0.875% 2022
6,000 USD 3.300% 2023
2,500 EUR 1.500% 2025
11,000 USD 3.650% 2026
3,000 EUR 2.000% 2028
50 One additional step that we have to take at this point is to check whether the company is able to meet its debt repayment schedule.
Most of the debt comes due in the next decade. Only $ 15 BN is scheduled to be paid in the period covered by our analysis, 2017-2020. The highest amount to be paid is scheduled for 2019 and it amounts to $6 BN including interest expenses and principal repayment. However, the EBITDA for that year is expected to be $ 26 BN, which is more than four times the amount to be paid.
Even in 2026 when the company has to pay more than $12 BN, it is only half of the EBITDA mentioned before. As a result, it is safe to assume for future purposes that the company can meet its debt
requirements in the future. However, the dividend payout and investments in CAPEX will be put under much pressure as a result of the debt obligations.
The above sections referring to Cost of Goods Sold, Selling, General and Administrative Expenses and Accounts Payables Management show the values of the synergies thus answering sub-questions number 3.