Buyout deal of the week: KKR soaks up auction win of Korean brewery

The buyout community isn’t likely to see another deal such as Kohlberg Kravis Roberts & Co.’s $1.8 billion carve-out of Korean beer maker Oriental Brewery any time soon. The year’s second-largest buyout was only made possible by the combination of a motivated seller and an unusual capital structure.

KKR’s bid was the lowest of the three final offers, which included separate proposals from Asian buyout firms Affinity Equity Partners and MBK Partners, according to a source familiar with the situation.

KKR won the auction because its offer was the only one with committed financing, the source said. This was key to Anheuser-Busch InBev because the company is fast approaching deadlines on the approximately $45 billion in debt it took on in its 2007 merger. For example, Anheuser-Busch InBev has a $7 billion bridge loan due this fall.

The beer giant was so motivated to sell Oriental Brewery that it set up a $300 million pay-in-kind note for the deal, something that wasn’t necessarily offered to KKR’s competitors, the source said.

As constructed, the acquisition has 4x leverage. Beyond the pay-in-kind note, KKR secured senior debt from seven lenders, including JPMorgan, to the tune of $750 million. The deal requires no high yield or mezzanine sub debt, despite the slowly returning demand for junk bonds, the source said.

While the firm may have paid less than other buyers were willing to pay, that’s not to say KKR didn’t pay a fair price. The $1.8 billion deal value, which is the second-largest LBO this year and the largest Asia-Pacific buyout, excluding Japan, since 2006, represents an 8.4x EBITDA multiple. Such a deal may have garnered 10x EBITDA in a frothier deal market.

“They had to sell something, and Oriental Brewery is a natural candidate because it’s run as a stand-alone business,” the source said.

The stand-alone aspect is what made the business so attractive to the buyout bidders. In addition, Anheuser-Busch InBev hopes to buy Oriental Brewery back in five or more years, and KKR has agreed to give the company the option to buy it back at a significant premium to KKR’s buy-in price.

Before that time comes, KKR has strategic plans for the company, which center on capital investments.

“This is not a cost-cutting deal for KKR because the company was run very lean, given Anheuser-Busch InBev’s capital constraints,” the source said.

KKR sees the deal as a growth investment, in which it will boost Oriental Brewery with sales, marketing and distribution investments as well as expanded plant capacity, the source said. In the meantime, the company will continue to share brewing techniques and best practices with Anheuser-InBev, as Oriental Brewery will also license such brands as Hoegaarden and Budweiser. —Erin Griffith