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Megabrew’s Megadebt Is a Megaproblem

Megabrew's Megadebt Is a Megaproblem

(Bloomberg Opinion) -- AB InBev’s punishing debt load has hit home. 

Moody’s Investors Service on Tuesday lowered Anheuser-Busch InBev NV’s credit rating to Baa1 from A3, after putting the grade on review for a cut in early October. This confirms that life has been getting grimmer for Megabrew since it came into existence two years ago. AB InBev has been lumbering under about $100 billion of debt, while grappling with a plunge in emerging-market currencies that has hurt profits.

The outlook on the rating is stable, which fits with Moody’s expectation for net debt to Ebitda to fall from about 5 times to 4 times within two years. The rating could be cut again if leverage does not fall to 4.5 times or below by the end of 2020. That would imply a serious deterioration in performance and cash flow.

Megabrew’s Megadebt Is a Megaproblem

Too bad the company didn’t take more action on its debt while it could. True, it cut its dividend in half in October, saving about $4 billion a year. Though eliminating the payout would likely be unpopular with its two big shareholders — tobacco giant Altria Group Inc. and Colombia’s Santo Domingo family — which can’t reduce their holdings until 2021, it seems to have taken a middle course between ditching it altogether and maintaining the status quo.

But AB InBev should have been proactive and cut its dividend more sharply when it had the chance. Having had the opportunity to be radical when the market was braced for it, and eschewing that moment, to go further now would be unpalatable.

The problem is its operating environment. The third quarter was particularly weak. As well as the challenges in emerging markets, it faces an uphill battle to improve sales in the U.S., where drinkers are turning to craft and local beers. It’s a tall order to do this while stemming the deterioration in performance.

Moody’s also warned that a big debt-funded acquisition before the company has brought down borrowings significantly could also lead to a downgrade. This means the AB InBev deal machine is well and truly out of action for now.

Megabrew’s Megadebt Is a Megaproblem

The company’s stretched balance sheet is a worry for equity investors. As Duncan Fox of Bloomberg Intelligence notes, it can’t count on big disposals, as this could hurt profitability and cash flow if it didn’t get the right price.

A return to its mantra of ambitious deals driven by equally ferocious cost cuts to fatten up margins, a strategy that had buoyed Anheuser-Busch’s stock for many years, will require more headroom to pursue transactions. As things stand, that approach, also favored by Kraft Heinz Co., is out of fashion among investors right now, as evidenced by the slump in the company’s shares. 

If AB InBev is to revive its stock, which has fallen by a third over the past year, bringing down borrowings is a must. This won’t be a quick fix. Eliminating the dividend can always be undone. The pain of a series of credit rating cuts can linger.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2018 Bloomberg L.P.