History
SABMiller has operations and distribution interests across six continents.
The company was founded as South African Breweries (SAB) in South Africa in 1895,
where the business operations were limited until 1995 with the entry into the European
market acquiring Dreher in Hungary. After this, the group began to expand operations
and/or distributions all around Europe.
In 1999 the company began to be listed on the London Stock Exchange to raise capital
for acquisitions. Thus, in 2002 the group purchased the Miller Brewing Company in
North America from the Altria Group and added Miller to its original name.
SABMiller expanded its operations to the Latin American market in 2005 with the
acquisition of a major interest in Bavaria S.A., South America's second largest brewer, in
Colombia. Actually the group has operations in another five countries of Latin America,
including El Salvador, Ecuador, Panama, Peru and Honduras.
The next important acquisition in Europe was on 9 October 2007 when SABMiller and
Molson Coors Brewing Company made a joint venture known as Miller Coors. It was
followed by the acquisition of Royal Grolsch in Europe on 19 November 2007.
Moreover, SABMiller has brewing operations in another 31 countries from the African
continent, and in Asia where is the second-largest brewer in India, has ventures in
Vietnam and Australia, and produces a Chinese brewer brand in partnership with China
Resources Enterprise Limited.
Different types of gearing ratio are used to calculate the financial leverage of the
company. The most commons way to calculate the gearing ratio is as follows:
Long-term debt over total equity, or
Long-term debt over long-term debt plus total equity
By using the any above formula gearing ratio can be calculated which determine the
financial leverage of the company. It tells us the level to which the firm performance is
funded by creditor funds.
2010
Long-term Liabilities
4,666
6,064
7,612
7,794
Shareholder equity
7,345
8,821
10,734
13,358
Gearing ratio's %
75.62
80.50
85.24
66.41
The gearing ratio of the year 2007,2008,2009,2010 is 75.62, 80.50, 85.24, and 66.41
respectively. We took the figures of long-term liabilities and shareholder equity from the
annual report of the company. The calculation of gearing ratio taken from the FAME.
Historical background
"Miller and Modigliani derived the theorem and wrote their path breaking article when
they were both professors at the Graduate School of Industrial Administration (GSIA) of
Carnegie Mellon University. In contrast to most other business schools, GSIA put an
emphasis on an academic approach to business question. The story goes that Miller and
Modigliani were set to teach corporate finance for business students despite the fact that
they had no prior experience in corporate finance. When they read the material that
existed they found it inconsistent so they sat down together to try to figure it out. The
result of this was the article in the American Economic Review and what has later been
known as the M&M theorem."
Conventional theory:
If there is only the cost of equity capital WACC begins. Because the capital is replaced by
cheaper borrowing money more expensive, WACC decreases. However, since the debt
will increase further, both debt holders and shareholders observe a higher risk, they may
need to increase revenue for both. Inevitably, WACC should be increased to a certain
extent. This predicts that there is an optimal ratio of capital to which the WACC is the
minimum.
Bankruptcy cost
The Company's Bankruptcy cost is including the cost of trustees' fees, legal fees and
other cost of reorganisation whereas the dead weight loss is incurred the firm's value
discounted value of the expected cash flow from operation. In 1977 WAENER measured
the direct cost of bankruptcy in railroads (1933-1955). There are assumed that
Modigliani and Miller is perfect capital market thus, the company would able to raise
the fund and avoid bankruptcy. But in the real world a biggest drawback of the
companies is their high level of debt which could backfires if they default to pay the rate
of interest and in consequence company faced bankruptcy and this bankruptcy risk
convey to shareholder and debt-holders. It is noted that shareholder suffer a high degree
of bankruptcy risk as they come last in the creditor's hierarchy on liquidation. However
the debt and equity increase the Working Capital while it is reduce the company's share
price. It also gives high level of gearing if it is modified with-tax model and then an
optimal capital structure appears with below the 99.99% level of debt which is
previously recommended. Evidence seems to support the view that capital structure
trades off tax shield gains against bankruptcy costs (SEE JU, PARRINO, WEISBACH,
JFQA, 2005).Optimal capital structure take on increasing amounts of debt finance until
the marginal gain from the debt finance is equal to the marginal cost of expected
bankruptcy
The justifications that support the pecking order there are three:
companies want to reduce the cost issue
Companies will want to reduce the time and expense involved convincing investors
outside the merit of the project.....
Agency Costs
An Agency costs are known as the 'principal-agent' problem. Most of the largest finance
providers companies actively they are not able to manage the company. In effect the
company need to employ an 'agents' which are not possible way to measure the equity or
debt- holders. If the company want to invest in high return project by raise fund from
debt holder where the level of company performance are satisfactory than shareholders
action could potential. Because they would get share from higher level of return
otherwise they would feel less interest to invest their money in high risk of project. But
debt holder would not get a share of the higher returns since their returns are not
dependent on company performance. Therefore debt-holder often imposes restrictive
covenants in the loan agreements for limit management's freedom of action. These
agreements would:
limit the further debt,
set a target gearing ratio and current ratio.
Interpretation:
The company seemed followed MM theory and the long-term borrowing had constant
increment. Based on the 2007- 2009, and the ratios increased from 75.62% to 85.24%.
In spite of 2009, the gearing ratio dropped to 66.41%, the debt still on an increased
trend and the total long-term borrowing increased from $2915 million in 2007 to
$7809million in 2009.
Whereas according to Pecking Order, the retained earnings should be the most
favourable finance for the company, however, SABMiller seemed not a case. The
company's retained holdings was not utilized as the priority of the finance, by contrast,
their main funding were from debt instead. Therefore it seems that SABMiller has some
bankruptcy cost and agency cost.
Dividend Policy:
Dividend policy (1961) defines as the rules and regulation to provide dividend payment
of companies shareholders. A specific dividend policy gives a high level of advantage of
the company and its shareholders. Because it is determine the impact of business
operation in terms of different number of test scenarios and therefore company should
have an efficient dividend policy to attract the shareholder for further invest in business.
There are two dividend policy company could adopt such as:
Dividends paid
years
Total Dividends
2010
924
160.4
68
"The board has proposed a final dividend of 51 US cents to make a total of 68 US cents
per share for the year- an increase of 17% from the prior year. This represents a dividend
cover of 2.4 times based on adjusted earnings per share, as described above (2009: 2.4
times). The group's guideline is to achieve dividend cover of between 2.0 and 2.5 times
adjusted earnings. The relationship between the growth in dividends and adjusted
earnings per share is demonstrated in picture below.
In addition, the directors are proposing a final dividend of 42.0 US cents per share in
respect of the financial year ended 31 March 2009, which will absorb an estimated
US$631 million of shareholder's funds. If approved by shareholders, the dividend will be
paid on 28 August 2009 to shareholders registered on the London and Johannesburg
Registers on 21 august 2009. The total dividend per share for the year is 58.0 US cents
(2008: 58.0 US cents)."
Leo Kiely the chief executive of SABMiller Plc comment that : "We continue to invest in
innovation behind our premium light brands, drive growth in our craft and import
portfolio and deliver synergy and cost savings as promised and Our consistent focus
generated positive net revenue per barrel growth for the fourth quarter. We are building
brand equity and improving our mix to meet the challenges ahead in 2011."
Interpretation:
It is assumed that SABMiller Plc is practicing M&M irrelevant dividend theory. Because
the market is competitive however from the appendix 2 we can see that their dividend
per share gone up over the five year whereas dividend per share growth increasing
except 2009. In 2010 dividend per growth is 17.24% and dividend yield ratio is 2.30%
which indicated company are concerned to reinvest of their profit.
company which ultimately lower its credit rating. Consequently a company has to pay
more money due to its lower credit rating as bank charge higher interest rate.
2007
2989
5717
-2728
52.28267
2008
4127
6203
-2076
66.53232
2009
3472
5345
-1873
64.9579
2010
3895
5977
-2082
65.16647
As we know working capital of SABMiller Plc is in extremely negative which is not good
for the investors and financial institution. The above data is taken from annual report
and financial statement links for these above figures are being given in the end of
assignment (Internet Reference).
Current Ratios:
The Current Ratios is one of the best known measures of financial strength. Its formula
is
If you feel your business's current ratio is too low, you may be able to raise it by:
Paying some debts.
Increasing your current assets from loans or other borrowings with a maturity of more
than one year.
Increasing your current assets from new equity contributions.
Putting profits back into the business
Quick Ratios:
The quick ratio is sometimes called the "acid-test" ratio and is one of the best measures
of liquidity. It is known as liquidity ratio.
The quick ratio is a much more exacting measure than the current ratio. By excluding
inventories, it concentrates on the really liquid assets, with value that is fairly certain.
The SABMiller Plc's Ratio
Appendix 4
SABMiller Plc
Consolidated Balance Sheet
2010
2009
2008
2007
2006
m
m
Total Current Assets
3895.00
3472.00
4135.00
2989.00
2829.00
Total Current liabilities
9204.00
7745.00
6257.00
5157.00
4865.00
Inventories
1295.00
1241.00
1362.00
928.00
878.00
Current Ratio
0.4231
0.4482
0.660
0.5796
0.5815
Quick Ratio
0.2824
0.2880
0.4431
0.3996
0.401
Form the Appendix 5 it noticeable that the SABMiller Plc's current ratio is not
favourable and it indicated that company are not capable to pay their obligation whereas
their quick ratio is favourable cause it decrease 0.2880 to 0.2824% by 2010 compare
than 2009.
Conclusion
The SABMiller plc is one of the leading brewers who operating across six continents.
The report approached their financial performance and risk Analysis with theatrical
impact. According to 2010 financial report group revenue up 4 %( US$8,330 million)
and EBITA up 6% with margin growth of 30 basis points (bps) driven by robust pricing
and cost efficiency as well as they also gain in share market. They have strong cash flow
of $2010M with dividend per share up 17%. However The SABMiller Plc's working
capital is not favourable and company enjoying a high level of debt risk.