Compania Cervecerias Unidas S.A. (ADR) (CU)

Overview: Compania Cervecerias Unidas S.A. (United Breweries Company, Inc.) is a diversified beverage company operating principally in Chile and Argentina.
Cool. Their primary business is making beer with 39.5% of 2007 net sales coming from Chilean beer sales and 11% came from Argentinean beer sales. 27.5% of their sales came from non alcoholic beverages (soda, mineral water, nectars/juices), 13.8% came from wine sales and 6.3% came from spirits sales. I will mainly be focusing on their beer business. The vast majority of this information comes through digging through the companies 20-F filing with the SEC.

Beer outlook for Chile: They have approximately 87% of the Chilean beer market share and the number one selling beer in Chile is one of their proprietary brands (Cristal) and accounts for 52% of all beer sales by volume in Chile. This is up from 86% of the approx market share in 2006 and a little lower than their all time high of 90%. Total sales volume of beer in Chile rose by 36% from 2003 to 2007, though it’s only up 4% year over year from 2006 to 2007. As long as Chile continues to experience positive population and economic growth beer consumption in Chile will probably continue to rise at a moderate pace and United Breweries (CU) should see most of the benefit due to their entrenched position. Hooray.

Beer outlook for Argentina: Argentina’s beer market is about three times the size of Chile’s and CU has about 16% of the total market share there. CU has the exclusive right (currently) to produce, market, and sell Budweiser brand beer in Argentina. They also have the exclusive right to produce and sell Heineken beer in Argentina. Heineken is the leading beer brand in the super premium segment in Argentina (according to CUs 20-F). In April CU bought Argentinean brewer ICSA (which controlled 5.5% of the local market share) which will also expand their domestic brewing capability in Argentina by 270 million liters.

Beer Industry Consolidation: InBev’s subsidiary AmBev is CUs primary competitor in both Chile and Argentina. CU currently has the license to produce and distribute Budweiser in Argentina through 2025. With InBev’s acquisition of Anheuser-Busch it’s possible (in my mind at least) that they might try to renegotiate those agreements. Budweiser accounts for 30% of CU’s sales volume in Argentina so any loss of rights there would certainly be a blow.

The Heineken Factor: Wild speculation on my part leads me to believe that further beer industry consolidation might lead to Heineken wanting to take CU over. 66.1% of CUs common stock is owned by a holding company called IRSA. 50% of IRSA is owned by Quinenco SA, a Chilean conglomerate, and the other 50% is owned by Heineken. That means Heineken already owns 33.05% of CU, so deciding to make a bid for total control of the company doesn’t seemed too far-fetched to me. CU already produces and distributes Heineken’s product and they might feel the need to increase their footprint in S. America and CU gives them some very well established infrastructure to work with. Of course any bid would drive the stock price up.

Even without a bid from Heineken CU has done incredibly well for itself. Earnings per ADS growth from 06-07 was 32%, they pay a dividend and the stock has taken a beating lately.

On the Dividend: It seems every financial site I go to lists the dividend as having a 7.5% yield, which isn’t true. The company is required by Chilean law to pay out at least 30% of its net income through dividend payments. CU in the last few years has paid out 60%. For 2007 this amounted to $1.61 per ADS, which at current prices would give you a yield closer to 5.5%. Of course there’s no guarantee next year’s payout will be the same, it’s entirely determined by the company’s net income and the exchange rate between the Chilean Peso and the US dollar dollar bill… which lately has been about 500:1. The Chilean government is also going to tax you at 35% on that dividend, so keep that in mind before buying this stock based on some dividend yield screen.