USA: CCU's Credit Quality Enhanced by A-B's Stake in Company
Within the past few years, the beer industry has become more global in nature. Large brewers such as Interbrew, South African Breweries, Heineken, Carlsberg and A-B have expanded their international reach through acquisitions, joint ventures and licensing agreements. The recent merger of Brazil's two largest brewers Brahma and Antarctica into AmBev has also created a beverage company of international scale within the region. 'In the near- to medium-term, these events do not pose a threat to CCU,' Bormann added. 'The barriers to entry that exist in the Chilean beer industry are high and make it unlikely that an international competitor would enter the market and build a greenfield plant. This formula was tried in the past without success.'
'Due to the beer consumption patterns of Chileans and the relatively low penetration of supermarkets in the country,' Bormann noted, 'it is necessary for brewers in Chile to have an elaborate distribution system that reaches the `mom-and-pop' corner stores.' The system that CCU operates in the country is unrivaled. It would be extremely expensive for an international competitor to try to replicate CCU's system.
'In addition, if another company wanted to spend a huge sum of money on a distribution system, its success in the market would not be certain. The second major barrier to entry that exists is the strong brand equity of the company's beer products.'
During 2000, the company had a market share of 89 percent, led by its flagship brand Cristal that alone enjoyed a market share of approximately 65 percent. The last major barrier to entry that exists is the low price that Chileans pay for beer.
'In Chile, almost all beer is consumed in returnable glass bottles. This helps CCU keep beer prices very low and makes imported beer extremely expensive,' said Bormann. 'At this time, most Chilean beer drinkers are not wealthy enough to purchase expensive beer.' Over the next decade these barriers are expected to decline. As consumers in the region get wealthier, they will become increasingly willing to purchase premium brands such as Budweiser and Heineken. It is important for CCU to have a strong relationship with one of these brewers at that time. Although CCU has enjoyed a strong relationship with A-B since 1995, especially in Argentina, this recent investment in CCU by A-B solidifies that relationship.
CCU is the leading brewer in Chile, the second largest soft drink bottler in Chile, the second-largest wine exporter in Chile and the third-largest brewer in Argentina. The company is expected to end 2000 with an EBITDA-to-interest expense ratio of more than 10 times (x) and a net debt-to-equity ratio of less than .5x. Fitch rates the senior unsecured debt of the company at 'A-'.
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