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Newsflash To Fed: 122 Billion Bottles Of Beer On The Wall Is About Asset Bubbles, Not Jobs
Submitted by David Stockman via Contra Corner blog,
While Janet Yellen and her band of money printers work themselves into a tizzy over whether two buzz words - “considerable time” - should be dropped from their post-meeting word cloud, they might be better advised to just read the newspapers. This morning’s WSJ brings word that the lending boom which our monetary central planners are eager to stimulate is apparently off-to-the-races.
Well, sort of. The item in question is a $122 billion globally syndicated loan to facilitate an M&A deal between the world’s two largest beer companies—AB InBev with a 20% global market share and SABMiller with 10%. Needless to say, the only possible reason for creating a monstrosity with $60 billion in sales spread among scores of highly differentiated regional and national beer markets is the “synergy” euphemism—-that is, the “savings” from thousands of job terminations especially in those two paragons of job growth known as North America and Europe.
So the purpose is self-evidently the opposite of the Fed’s intent—whether the sweeping job cuts which Wall Street will peddle to justify the deal actually happen or not. In any event, the deal has virtually nothing to do with real market economics.
Both companies are already giant M&A roll-ups representing a string of mergers that have been going on for two decades, including the $52 billion InBev purchase of Anheuser-Busch six years ago. But you don’t have to be an expert in the beer industry to realize that these rollups were mainly the product of cheap debt and financialization, not free market economics. Recall that the beer industry ran out of true economies of scale 30 years ago when world class breweries reached their maximum efficient size in terms of production and distribution.
What has been happening in the business since then is nearly the opposite—that is, the rise of diseconomies of scale in marketing and branding. The latter is surely attested to by the explosion of specialty premium brands and micro-breweries.
Stated differently, in the absence of drastic financial repression by the world’s central banks there would be no case whatsoever for the globe-spanning beer merger now at hand. The latter will only create more dis-economies of scale as all the pieces and parts from two decades of financially driven M&A create another artificial, discombobulated enterprise which is too big to manage and wrong-sized for the nature of the market which it serves.
But since cheap debt always trumps expensive labor, Wall Street’s M&A machinery will create another giant malinvestment. And having once again shot themselves in the foot, our monetary central planners will bray that the labor market is still too weak and that it must therefore keep rates lower for longer.
Just maybe, however, the Fed’s new financial stability monitoring group might note something suspicious about this mega-debt deal percolating up through the deal machinery. Namely, that both companies are already vastly over-valued momentum plays that can be explained only by the fact that the financial markets have been turned into gambling casinos based on zero cost carry trades, the availability to speculators of sub-economic downside insurance protection and the triumph of “buy-the-dips” one-way trade.
Specifically, the TEV (total enterprise value of debt plus market equity) of the two beer giants combined is currently around $340 billion, yet in the most recently reported LTM period InBev generated just $19 billion of free cash flow (EBITDA less CapEx) and SABMiller under $6 billion. In sum, their combined number for that crucial valuation metric is just $25 billion, meaning that they are trading at 14X free cash flow.
Folks, these two momo plays are in the suds business, not social media! The overwhelming share of their cash flow is generated in Europe and North America were volume has been flat for two decades, as shown below. Even on a global basis, industry growth over the last 17 years has averaged only 2% per annum; and most of that is attributable to China where competition is plentiful, prices cheap, profits scare and the government is increasingly unfriendly to foreign companies.
So what we have here is a giant overvaluation bubble in the suds business. Yet the result of current central bank policy is just more of the same. In fact, at the rumored $122 billion, the loan now brewing would amount to 6.5X free cash flow. In a no-growth business in a world where interest rates must eventually normalize–that is sheer lunacy. But it well explains why our monetary politburo is so reluctant to let interest rates normalize and is so deathly afraid of a Wall Street hissy fit.
None of this would happen in a world with honest interest rates and stable two-way capital markets for the simple reason that the financing could not be raised; boards and CEOs would have no momentum driven stock market inducing them to engage in patently irrational mergers; and, in any event, short sellers would swiftly punish serial roll-up machines that destroy rather than create sustainable economic value.
So here is a news flash for the Fed’s financial stability monitoring committee. The combined beer companies today have about $60 billion of net debt. The merger deal in question would thus double the new company’s debt in order to destroy several thousand breadwinner jobs. You think that might suggest that there are some bubbles out there after all?
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M&A: answering the question how high can we pile this crap?
and we're gonna *keep* giving them trillions until mom and pop dis-hoard their thousand-dollar nest egg
I hope this is clear enough
hugs,
misteryellens
Haha! The two largest brewers are forced to get in bed together so that they can circle the wagons because they are getting their asses handed to them by microbrewers around the world. Love it!
Here Here
in case you couldn't tell ... Bell's rocks:)
Almost to Munster, IN
Ma Bell, Ma Beer ... antitrust formulism is dead.
mmmmmm beer
The mergers will keep going until we get to one GiAnt beverage company.
It's flagship product will be " Brawndo".
It will have electrolytes .
"While Janet Yellen and her band of money printers work themselves into a tizzy over whether two buzz words - “considerable time” -"
You know it's a religion when they discuss the number of angels that can dance on the head of a pin or they extensively discuss the words "considerable time".
Stay thirsty my friends!
Spending like drunken Sailors with someone else's credit card.
...& the Bartender says that happy hour is being extended until at least Q1 2015.
Brew your own... be forever happy.
Amen, bro. Brewed us up a lovely porter yesterday.
I thought "ginning up the vote" meant free beer...not "the most delicious brew ever made in history! (you gotta pay for that.)"
I mean seriously...drink water. "It's free." Same goes for internet access and the interstate highway system. Sorry but margin compression happens when your mission to inflate all debt away is then followed by a recession. "No matter the policy the business cycle still exists."
FM, -- you betcha. And I added Willamette and Sterling hops to the fence row this year.
No real need for expensive equipment. I use common kitchen kettles and a glass fermenter. Wine making experience is helpful for beginners (me).
Gonna start a batch (6 gal.s) of Mead this Friday!
On the lighter side _
A study found that beer contains large amounts of the female hormone estrogen. When male subjects were given large doses 6 - 10 beers they talked excessevly and couldn't drive for shit!
Brilliant; all the new unemployed will
be at home, depressed and drinking. Bravo ZIRP
InBev is a bastard
next time you're in the store check the 12pack of Stella Artois ... 11.2 ounces for your "12 ounce weight"
i bought their "deal" once ... then realized i'd been scammed.
Scratched them off my list of beers to buy.
Take that InBev
pot > alcohol
It sounds to me that the new headquarters will not be in America....
Best beer deal going: Costo Kirkland. 24 bottles, 4 varrity mix (IPA, Amber....etc), $.076 per bottle.
All these M & A deals only benefit the new class upper management. The shareholders get the shaft because real value has not been gained it has been lost, employees don't benefit due to the soon to come layoffs, the customer doesn't get a better product at a lower price, it is only those that orchestrate the deals that get giant bonuses for doing it... even if every one else looses.
The definition of the Principle Agent Dilemma.
"None of this would happen in a world with honest interest rates and stable two-way capital markets for the simple reason that the financing could not be raised; boards and CEOs would have no momentum driven stock market inducing them to engage in patently irrational mergers; and, in any event, short sellers would swiftly punish serial roll-up machines that destroy rather than create sustainable economic value."
Perfect, Mr. Stockman.
I'm certain the FED exists to be the antipode of honest interest rates and stable two-way capital markets.