8. Drivers and Measures of Value Creation
8.1. Return on Invested Capital
8.1.2. Return on Invested Capital Forecast
In the following section, we will question whether the combined company, AB InBev and SAB Miller, will provide a better ROIC than the weighted average of ROIC of AB InBev and SAB Miller as separate entities.
What we are questioning, in the end, is if 3G Capital management is bringing any value i.e. will the measures deployed by 3G on the merged company generate more value than the companies if they were continued to be ran as before the merger corresponding to sub question 4.
𝑅𝑂𝐼𝐶 (𝐴𝐵 𝐼𝑛𝐵𝑒𝑣&𝑆𝐴𝐵 𝑀𝑖𝑙𝑙𝑒𝑟) ≥ 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 (𝑅𝑂𝐼𝐶 (𝐴𝐵 𝐼𝑛𝐵𝑒𝑣)+ 𝑅𝑂𝐼𝐶 (𝑆𝐴𝐵 𝑀𝑖𝑙𝑙𝑒𝑟))
The cut-off date will be 2020 as this is the year the full integration and synergies will be achieved.
For calculating ROIC for the merged company we will use as a source the Consolidated Financial Statements for the merged company shown in the previous chapter. For the calculation of ROIC for the separate entities and the weighted average one, we will use the Pro forma Financial Statements.
12.53% 13.09% 13.66% 14.26%
9.98% 10.54% 10.84% 11.18%
8%
10%
12%
14%
16%
18%
2017 2018 2019 2020
Return On Invested Capital
AB InBev SAB Miller Weighted Avg (AB+SAB) AB&SAB
Exhibit 41: ROIC 2017-2020. Source: Author's elaboration
57 The merged company contains all the cost cutting and capital structure changes imposed by 3G Capital. The merged company, AB&SAB, is then compared with AB, SAB and the weighted average of both. AB and SAB act as separate fictional entities as if they were run in the future as before (without being merged). We can think of the weighted average company AB+SAB, that it represents how the two companies would combine under a merger of equals, not an acquisition as it was in practice, and without any particular management intervention. A merger of equals happens when two organisation of roughly the same size merge to form one company. In a merger of equals, the shareholders give up they shares in the two businesses and receive securities in the newly formed company52 i.e. they are not paid a premium (as it was the case with SAB Miller shareholders.
We observe the ROIC of the merged company is much less than that of the weighted average of AB and SAB. In other words, the cost cutting measures and the capital structure modification done by 3G Capital does not create more value than if the two companies were separate entities or merged as equals.
Since the time frame we are focusing on is just four years, a period where all the cost synergies are
happening and none of the revenue synergies materialize, we conclude that the cost cutting measures right after the merger are not enough to create additional value.
In order to examine what drives the value down, we will decompose the ROIC into Profit Margin and Turnover Rate of Invested Capital. For a detailed calculation, see Appendix – Return on Invested Capital
52 (Investopedia, 2017a)
23.74% 24.08% 24.39% 24.72%
27.85% 28.53% 28.43% 28.40%
16%
18%
20%
22%
24%
26%
28%
30%
2017 2018 2019 2020
Profit Margin
AB InBev SAB Miller Weighted Avg (AB+SAB) AB&SAB
Exhibit 42: Profit Margin 2017-2020. Source: Author's elaboration
58 2017-2020.
The Profit Margin of the merged company is higher than AB, SAB and their weighted average. The result is not surprising since the merged company encompasses all the cost-cutting measures implemented by 3G.
Comparing the above figures with the ones from the industry in the previous section, they seem to be acceptable for the brewing industry and not out of line. This serves us as a double check to the financial model that predicted the Profit Margins.
The Turnover Rate of Invested Capital of the merged company AB&SAB is about 15 percentage points lower than that of the weighted average of AB + SAB.
After checking the above figures with the ones for the industry, they seem to be in line thus confirming the forecast method in the financial model.
Consequently, although the Profit Margin of the merged company is higher, the Turnover Rate of Invested Capital causes the drop in Return on Invested Capital.
For each line item that composes the Invested Capital, we will calculate the number of days on hand to obtain details both on the relative importance and the trend on each line item. Days on hand indicates the number of days an accounting item is consuming cash53.
𝐷𝑎𝑦𝑠 𝑜𝑛 ℎ𝑎𝑛𝑑 (𝑓𝑜𝑟 𝑒𝑎𝑐ℎ 𝑖𝑡𝑒𝑚) = 365
𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑒 (𝑜𝑓 𝑒𝑎𝑐ℎ 𝑖𝑡𝑒𝑚)
53 (Plenborg and Petersen, 2012).
52.77% 54.35% 55.99% 57.70%
35.83% 36.94% 38.13% 39.36%
35%
45%
55%
65%
2017 2018 2019 2020
Turnover Rate of Invested Capital
AB InBev SAB Miller Weighted Avg (AB+SAB) AB&SAB
Exhibit 43: Turnover Rate of Invested Capital 2017-2020. Source: Author's elaboration
59 AB&SAB Days on hand of Invested Capital weighted average (AB+SAB)
2017 2018 2019 2020 2017 2018 2019 2020
21 21 21 21 Inventories 22 22 22 22
25 25 25 25 Accounts Receivable 25 25 25 25
4 4 4 4 Prepaid Expenses 4 4 4 4
6 6 6 6 Tax Receivable 6 6 6 6
56 56 56 56 Current Assets 57 57 57 57
643 625 608 591 Total Intangible Assets 643 625 608 591
330 320 311 302 Goodwill related to the 2016 merger 0 0 0 0 154 154 154 155 Property, Plant & Equip, Net 154 154 154 155
53 52 50 49 Investments in Affiliates 53 52 50 49
8 7 7 7 Deferred Tax Assets 8 7 7 7
4 4 4 4 Other LT Receivables 4 4 4 4
1 1 1 1 Misc LT Assets 1 1 1 1
1,193 1,164 1,136 1,108 Non-current Assets 864 844 825 807
118 119 121 123 Accounts Payables 116 116 117 117
5 5 5 5 Deferred Revenue 5 5 5 5
87 88 88 88 Deferred Tax Liabilities 87 88 88 88
14 14 15 15 Other Provisions & Creditors 14 14 15 15
1 1 1 1 ST Provisions 1 1 1 1
5 5 5 4 Misc ST Liabilities 5 5 5 4
231 232 235 237 Non-interest Bearing Debt 229 229 230 231
1,019 988 957 927 Net Operating Assets 692 672 652 633
Exhibit 44: Comparison of Days on hand of Invested Capital for AB&SAB and weighted average (AB+SAB). Source: Author's elaboration
The comparison shows the sole reason the Turnover rate of Invested Capital of the merged company is diminished compared to the weighted average one is the investment in Goodwill related to the 2016 merger. As a conclusion, the Return on Invested Capital decreases because the benefits of improving costs and optimizing net working capital are out weighted by the heavy burden of goodwill and debt (depending on which side of the balance sheet you are looking) acquired in relation to the merger.
60