Analysis

Analysis - Time for Heineken to make a European break

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While Netherlands-based Heineken has been busy snapping up assets in the likes of Latin America and Asia-Pacific in recent years, the company still has too many chips on Europe. The time is fast approaching, then, for the brewer to go shopping again, ideally a little further from home.

Despite a global footprint, Heineken still has an over-reliance on Western Europe

Despite a global footprint, Heineken still has an over-reliance on Western Europe

In a year-to-date trading update yesterday, Heineken reported a 1.5% dip in sales in the nine months to the end of September, off the back of flat volumes. The first excuse out of the bag was the unseasonable weather that Europe suffered in Q3.

Despite upping its footprint in Mexico, through the purchase of FEMSA Cerveza in 2010, and spreading its wings in Asia Pacific by buying out its joint-venture partner in Asia Pacific Breweries two years later, an over-reliance on as staid a region - with such unreliable weather, to boot - as Western Europe will always carry a threat for an international brewer.

"Heineken has a broadly balanced geographic-mix, with circa 55% of profits coming from high-growth emerging markets, though still skewed towards Western Europe," says Trevor Stirling at Bernstein Research in a note this morning.

According to Bernstein, the markets of Western Europe generate 36% of the brewer's sales and 25% of its operating profits.

Another analyst note today backs up this argument. "Even with Heineken’s recent aggressive and generally effective expansion into emerging markets," the note says, "the company still remains highly leveraged to Europe for nearly 40% of its earnings and Europe is a difficult market if conditions are not exactly right."

Indeed, in this day and age, any global brewer that considers markets such as France, Italy and the UK to be 'key' isn't going to set the world alight any time soon.

Is Heineken poised to go shopping, then?

CFO Rene Hooft Graafland said as much yesterday in the post-results conference call. “Consolidation has been a big thing in our industry and will certainly not stop," he said. "We have been an active player in that consolidation and we have the intentions to stay an active player.”

While the question"Where?" might be a tough one to answer – there aren't really any areas of the globe that remain untapped by the international brewers - analysts at Nomura have made the following calculation for "How much?"

"With net debt/EBITDA now down at 2.5x," Nomura says, "we estimate the company could finance up to EUR10bn (US$12.7bn) of acquisitions from debt, while keeping net debt/EBITDA under 3.5x."

While Heineken has been quick to hammer home its ownership sovereignty in recent weeks, what is fast becoming more pressing is the need to spread its wings.


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