Description

Heineken Holdings is the Dutch holding company for publicly traded Heineken NV.

Heineken NV is Western Europe’s leading brewer and is a leading global beer company in terms of geographic reach. Approximately 51% and 47% of sales and EBITA respectively are from Western Europe, 18% and 14% from Central Europe (from the recently acquired Brau Union brands), 15% and 21% from North America (including its proportionally consolidated stake in CCU), and the rest from Asia, Africa, and the Middle East.

The company has 120 brands in addition to its Heineken and Amstel flagships, though only Heineken and Amstel are considered international brands. In most markets Heineken is positioned as a premium brand (except ironically in its home market of the Netherlands and in the UK) and Amstel as a mid-price brand. In its core markets, it holds a number 1 or two spot and is also the number 2 import in the US. The Heineken brand itself was 19% of total group volumes while Amstel was 9.1% in 2004. The remainder of the portfolio is distributed unevenly amongst the remainder of the brands.

Heineken Holding owns 50% of Heineken NV. The holding company has immaterial holding company expenses and serves as a control mechanism for the Heineken family. The family’s Swiss-based L’Arche Holding owns 50% of Heineken Holding. Due to the relative lack of float and the economically unnecessary shareholder structure Heineken Holding usually trades at a discount ranging from 5% to 25% though there is no real reason for it to trade at a discount at all. To calculate the discount simply compare the share price of Heineken to that of Heineken Holdings. I’ll note here that the investment thesis is not that the discount is attractive, rather that Heineken NV is cheap and that through the Holding company one receives a double discount.

The stock (both of them) has been weak over the past several years due to a number of factors. Often blamed is the company’s newfound generosity when acquiring other brewers. The acquisition of Brau Union, which I wrote up on this site several years ago, is a case in point. Many investors argue that they were too aggressive in acquiring this mature Central European player, though I believe that addressing the massive cost inefficiencies inherent in Brau Union will allow Heineken to achieve a satisfactory return over time. Another culprit has been the weak dollar, which I estimate has eroded Heineken’s operating profits by 100mn euro on an annual run-rate basis. This amounts to 8% of estimated 2005 EBITA. Finally, the company’s growth rates have been steadily ticking downwards as they diversify into more mature markets such as Central Europe and as industry growth rates generally slow as is the case with import brands in the US.

Offsetting these headwinds is valuation and a management team that is proactively trying to come up with some growth and profit enhancing initiatives. As far as growth, the company has announced a deal to distribute the brands of Femsa (Dos Equis, Tecate, etc.) in the US and has also announced the introduction of Heineken Light in certain markets in the US. In terms of profit/cash flow enhancement, the company tends to invest heavily in PP&E thus depressing EBIT margins and this should continue to depress EBITA margins versus its competitors. However, management has recently begun to focus on cash flow issues, namely working capital and trade loans, which will boost free cash flow and there are also many cost inefficiencies within recently acquired Brau Union/BBAG that can be addressed such as overlapping production and process bottlenecks. All in all, though profit growth may stay tame in the near future, cash flow growth will likely remain solid despite a not-too-rosy near-term sales outlook.

Valuation
Heineken NV
Price 24.60euro
Shares O/S 490mn
Net Debt 2005e (including pensions etc) 3,000mn
EBITA 2005e 1,370mn
EBITDA 2005e 2,070mn
Enterprise Value 15,000mn
EV/EBITDA 7.2x
EV/EBITA 11x
Dividend Yield 1.6%

Look through value at Heineken Holdings’ level
Price: 22.20euro
Shares O/S 245mn
No debt or expenses at the holding company level
Enterprise Value 14,000mn
EV/EBITDA 6.5
EV/EBITA 10x
FCF yield 8%
Div yield 1.8%

For a cash generative global business that has internationally recognized brands with long-established leadership positions in its core markets the current quote seems too low.

Catalyst

dollar strengthening
heineken light introduction
resumption of growth