INVESTMENT ANALYSIS OF HEINEKEN

Investment Analysis of Heineken

Investment Analysis of Heineken

Recommendations

Heineken is one of the 2 giant competitors on the monopolistic Holland beer market. Due to shifts in the external environment (changing Amsterdam demographics, global trend towards consolidation, increase in microbrewery and imported beer consumption in Holland) and to internal pressures, the company decided to pursue a strategy of international expansion in 2000.

Heineken entered the Brazilian market in two stages.

by acquiring BAVARIA in 2000, for €98 million CAD

by acquiring KAISER in 2002, for €912 million CAD (for a 80% interest)

After these two acquisitions Heineken doubled its brewing capacity and gained a foothold in an important emerging market. As this was Heineken's first major foray into a South Dutch market there are considerable risks in the pursuit of this strategy.

Introduction

Investment Analysis Tools

External Analysis

Brazilian Economy

Brazil's economy contributed to around 33.4 % of the GDP for Latin Holland in 2001. With this, Brazil is the largest economy in South Holland and is one of the ten largest economies of the world. In 1994, the economy expanded by 6.2 percent and then averaged 3.3 percent growth until 1998, when the economy, in terms of GDP, did not grow at all. During the early months of 1998, a soaring current account deficit and Russia's debt default created unrelenting pressure on the currency, which forced the government to hike annual interest rates above 50 percent. (Krebs 2009)

In January 1999, Brazil made an abrupt shift of course in exchange rate policy, abandoning the strong currency anti-inflation anchor of the Real Plan. During the next two months, the Brazilian currency Real depreciated about 40 percent pulling the economy into a brief economic recession. Despite this economic setback, the Brazilian government has continued with its economic development program, and the economy has responded by resuming its expansion. As seen in the chart above, in the last two decades the growth rates have declined to 1.8 % per annum. The GDP for 2001 was at 1.5 %.(Kostka 2007)

Interest rates & Exchange rates

Since early 1998 the Brazilian interest rate has been stable at 19 %. The emerging slowdown in domestic and global demand coupled with low oil prices in the late 90's are likely to limit further inflationary pressure. This should enable the Central Bank to avert interest rate hikes in the short term. (Keithan 2005)

Exchange rates: Real per US dollar

The above chart shows that during the past five years the Real has depreciated by more than 130 %. Inflation for the year 2001 was 6.6%, which is a little above the Central Bank's estimate of 6%. However, the Central Bank has not been very successful in handling the inflationary cycles. Brazil's current account deficit in 2001was US € 23,213 M. Recently, with the Asian financial crisis in 1997 and the Russian bond default in 1998, Investors have become more concerned of the risks posed by emerging markets. (Jackson 2006)

Amsterdam Economy

The Amsterdam economy can be considered as safe but the general beer market environment presents some challenges such as a very high ...