LEUVEN: Anheuser-Busch InBev NV is well-known for its ambitious goals, but its latest—$100 billion in revenue by 2020—is a real stretch, albeit a tantalizing one.
The goal is part of a new performance-based incentive plan noted in AB InBev’s annual report filed March 14. It was first disclosed in an attachment to a Securities and Exchange filing in December, shortly after AB InBev announced its roughly $108 billion deal for rival brewer SABMiller PLC.
As part of the plan, the Belgian company in December issued a special stock-option grant to be awarded to 65 senior managers if they succeed in boosting the combined companies’ revenue more than 50% by 2020. AB InBev’s revenue for the 2015 fiscal year was $43.6 billion, while SABMiller’s was $22.1 billion, bringing their combined total to $65.7 billion, excluding divestitures.
If the company achieves the growth targets, the performance plan could conservatively put $350 million in the managers’ pockets.
An AB InBev spokeswoman said the “2020 Dream Incentive Plan” is part of an “internal stretch target” and not official company guidance. She declined to explain why the plan excludes AB InBev’s executive management board—its 16 highest-ranking executives including Chief Executive Carlos Brito, Chief Financial Officer Felipe Dutra and six regional presidents. It is unclear what their stated performance goals are.
What is clear, people who have studied the company say, is that to reach its revenue goal AB InBev will have to either make another big acquisition or crank up growth considerably.
The brewer has a better record of acquiring companies and cutting costs than boosting revenue. After the 2008 acquisition of Anheuser-Busch, the company delivered sizable profit gains by cutting staff and increasing prices to counter declining volumes of beers like Budweiser and Bud Light. An incentive plan following that deal rewarded executives for reducing debt quickly.
But growth has been elusive for AB InBev in the U.S., its largest market, with volumes and market share declining the past six years and revenue falling 2% in 2015 after rising just 0.5% in the previous year.
In November, Mr. Brito said he planned to expand Bud, Corona and Stella Artois across Latin America and Africa, markets that account for 68% of SABMiller’s revenue. Africa is expected to drive beer-industry sales with compound annual growth in volume of 3.7% through 2020, according industry tracker Plato Logic.
But to reach $100 billion in revenue, AB InBev would have to register annual growth of about 8.8% for the newly merged company through 2020 or 6.2% annually through 2022, an extended period allowed by the plan. That would require a significant increase from its 2.9% compound annual growth rate since 2009, the first year after the Anheuser-Busch acquisition.
“It is very difficult to see them achieving that [$100 billion target] without M&A,” said Mark Swartzberg, an analyst with Stifel Nicolaus & Co. He added that the performance plan feeds speculation that AB InBev may pursue Coca-Cola Co. Alternatively, it could look at a spirits company like Diageo PLC or brewers in Africa or Asia, he said.
AB InBev’s shares were trading at $124.50 on Dec. 22, the day the options were granted. The options carry an exercise price of about $123.80; so if shares rise at an annualized rate of about 10%, as the S&P 500 has on average since 1929, and if the revenue goal is hit, then executives would stand to take home more than $350 million upon the exercise of their options. If the share price more than doubles by 2020, as it did in the past five years, then executives could earn more than $625 million.
Performance-based incentive plans with rich rewards are common in the wake of mergers, said Brian Cadman, a University of Utah accounting professor who specializes in executive pay. But he said performance targets are usually reserved for combinations with less-certain prospects such as the Hewlett-Packard-Compaq and Time Warner-AOL mergers.
“The question in all of this is: Is Africa the place?” Mr. Cadman said. If it doesn’t offer the “huge opportunity” management anticipates, he said AB InBev has incentive to cut another deal because executives are “set to profit quite substantially if they meet the target.”
Mr. Cadman said it is “puzzling” that AB InBev’s 16 top executives were excluded from the plan. “Generally, incentives related to growth, and other revenue or earnings targets are intended to align top executives and midlevel managers, not separate them.”