AmBev merges Dominican operations with CND

AmBev announced yesterday afternoon it will merge its operations in the Dominican Republic with E. Leon Jimenes SA's (ELJ) 83.5% interest in Cerveceria Nacional Dominicana (CND). AmBev will have an initial interest in the holding company of 41.76% with the right to nominate 5 Board members while ELJ will have the right to nominate 4 Board members. On top of bringing in its regional operations in the Dominican Republic AmBev will pay a cash amount of about $ 1bn. Closing of the transaction is expected for 2Q12. Upon closing of this above mentioned transaction, AmBev will also acquire Heineken's 9.3% stake in CND (for $ 237m), raising its stake in CND at that point to approximately 51%. AmBev will report CND on a fully consolidated basis.
The combined businesses include beer, malt and soft drinks in the Dominican Republic (which represents the overwhelming majority of revenues), Antigua, Saint Vincent and Dominicana as well as exports to 16 other countries. CND mainly is a beer business and realized a volume of about 1.4m hl in 2011 with a local market share in the Dominican Republic of about 79%. The latest available fact sheet from AB InBev on the Dominican Republic (data on 2009) shows the company had volumes of about 1.5m hl (beer and soft drinks combined with a market share in beer of about 14% and in soft drinks of about 32%). We understood that AB InBev’s current beer market share is about 20% which means the combined operations would hold close to 100% market share. Nevertheless, the company believes there will be no antitrust problems on this transaction as the combined share of throat of the beer operations vs. total alcohol consumption is about 52%.
Revenue of the combined operations was about $ 570m (pro-forma 2011 data) while the estimated combined EBITDA for the first 12 months of operations (starting as from the closing of the proposed transaction) is about $ 190m (no precise split was offered but CND posted about $ 129m EBITDA in 2011). Based on the $ 190m EBITDA guidance ABI claims that the EV/EBITDA multiple is about 13x. However, the $ 190m includes some unidentified synergies. If we use the valuation of the sale of the Heineken stake as a proxy (9.3% stake will be sold for $ 237m compared to the 2011 CND EBITDA of about $ 129m) the EV/EBITDA11 multiple would be over 19x. AB InBev claims the transaction will be EPS accretive in the first year of operations.

Conclusion:
The price seems quite high but we believe significant synergies potential exists. As we remain somewhat wondered why antitrust authorities would approve a deal that would yield a market share of close to 100% we decided not to include the transaction in our earnings model until closing. Note however that this still is a fairly small transaction for AmBev/AB InBev (ABI's 2011 EBITDA was about $ 15.4bn) with minimal impact on the balance sheet (net debt increases from about 2.3x EBITDA at year end 2011 to a pro-forma multiple of about 2.4x). Hold and 56 target price are maintained.