AB InBev buys back Korea’s Oriental Brewery from KKR, Affinity Equity

The sale by KKR & Co and Affinity Equity Partners will be Asia’s biggest ever for private equity, excluding flotations, and rewards them with returns of more than five times their investment.

However AB InBev can claim with Jan 21’s deal to be paying a reasonable price for a business that has grown in value in the five years since it was sold for $1.8 billion. That sale was one of the aggressive divestments forced on InBev after its $52 billion purchase of U.S. brewer Anheuser-Busch in 2008.

AB InBev shares rose 1.0 percent on news of the deal, making them the strongest performer in a STOXX 600 European food and beverage index, which was up 0.3 percent.

Andrew Holland, analyst at Societe Generale, said the price was pretty fair considering OB’s improved profitability.

“AB InBev is looking for areas of growth faster than in its existing business,” he said. Referring to the brewer’s two largest markets, he added: “I’m cautious on the U.S. and there are question marks over underlying growth in Brazil beyond the World Cup and weather bounce expected in 2014.”

OB, with top-selling lager Cass, has become Korea’s largest brewer with a 60 percent market share. It raised its core profit (EBITDA) to some $500 million last year – 2.3 times greater than when KKR and Affinity acquired it.

Korea is a relatively mature beer market, with 40 liters drunk per capita per year, on a par with China. Growth was 2 percent per year from 2009 to 2012, and seen at a little over an annual 1 percent for the subsequent 10 years.

The overall price of AB InBev’s deal – excluding a $320 million cash payment it expects to receive – is some 11 times OB’s EBITDA. That’s well below the 16 times Heineken paid in 2012 to take control of Asia Pacific Breweries, which is active in faster-growing southeast Asia.

The more modest multiple may also reflect the fact that KKR and Affinity have probably already made many of the sort of cost cuts that AB InBev typically seeks from its acquisitions.

Analysts said AB was likely to find further savings from cheaper procurement of raw materials due to its global scale and by pushing its higher-margin premium brands, such as Budweiser and Stella Artois via OB in Korea – as well as selling OB’s beers outside Korea.

 

ASIAN ATTRACTION

AB InBev had an option buy OB back within five years of the date of the 2009 sale. Its decision to strike before the July deadline underscores the hot competition for brewing and liquor assets in the region.

The deal comes a week after Japan’s Suntory Holdings agreed to buy spirits maker Beam Inc for $13.6 billion. Carlsberg, Heineken NV and SABMiller Plc have also struck deals in Asia over the past five years, lured by the region’s $258 billion market that is growing twice as fast as the rest of the world.

“The longer InBev waited, the more expensive it became and they also risked leaving room open for other suitors to knock at the door of the sellers,” said one person with knowledge of the original deal.

OB, along with Hite Jinro controls 90 percent of Korea’s beer market, making it relatively easy to raise prices. Its premium segment could also grow from some 10 percent of the overall beer market closer to the 20 percent plus of mature western Europe and North America.

However, the OB buy is more of an add-on than a transformational deal, given AB’s size. Its last big purchase was $20.1 billion in 2013 for the remaining half of Mexico’s Grupo Modelo.

AB InBev said it would draw on existing liquidity to fund the deal and would still be able to bring its net debt/EBITDA ratio to below two times in 2015, though perhaps six months later than planned.

Some analysts said the OB purchase could mark the start of a push by AB InBev beyond its core markets in the Americas, with other add-on deals possibly in China. The brewer has a relatively small presence in Asia Pacific.

 

BIG PRIVATE EQUITY RETURNS

KKR and Affinity’s sale of Oriental Brewery represents a multiple of over five times the cash they paid, according to a source with knowledge of the matter, a huge return for a deal of this size and rewarding the firms with hundreds of millions of dollars in net profit.

For the buyout firms, it was a high-risk deal less than a year after the collapse of Lehman Brothers when there was no clarity on how long the global recession would last.

Citigroup and Morgan Stanley advised KKR and Affinity and Deutsche Bank AG and Lazard advised AB InBev, according to a source with knowledge of the matter.

Stephen Aldred and Philip Blenkinsop are reporters for Reuters News