Verizon-Verizon Wireless and ABI-Inbev

The situation at Verizon and Anheuser-Busch Inbev is remarkably similar. Verizon's cash cow is Verizon Wireless, where it owns only 55%. However, it fully consolidates VZW. Similarly ABI owns only 61% of Ambev, which is the real cash cow. ABI too consolidates ABV.

The fully consolidated businesses at both companies - wireline in case of VZ, and ex-Ambev biz in ABI, is where the disproportionate amount of consolidated debt is. So looking at consolidated debt/EBITDA for both these companies is wrong, unless one adds the market value of the minority stake in subsidiaries to debt.

Similarly, the FCF yield for both these companies is vastly over-estimated. Analysts estimate ABI is trading at 10% FCF yield. That's incorrect. ABV doesn't pay off its entire FCF as dividends. So, the consolidated FCF looks much better than the real economic benefit to ABI. The real FCF yield is closer to 8% than 10%.

In Verizon's case, the FCF yield is even more exaggerated. Wireline biz doesn't generate any FCF today due to FiOS capex. The reported FCF is all from wireless, so it needs to be multiplied by 55% (VZ stake in VZW) to come to VZ's real FCF yield today.

Both VZ and ABI have to figure out ways to tap into the cash flow of their subsidiaries - VZ to fund its dividend (its wireline biz can't fund the dividend on its own today), and ABI to reduce its leverage. The best solution is if it happens in a way other than a dividend from the subsidiaries. If VZW or ABV pay a high dividend, the consolidated debt picture at VZ and ABI will look much worse, as there will be cash leakage to minority shareholders in the subsidiaries.