KKR Wins Auction For Korean Brewer

The buyout community isn’t likely to see another deal like 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.

According to a source familiar with the situation, KKR’s bid was actually the lowest of the three final offers, which included those from buyout firms Affinity Equity Partners and MBK Partners, who are both headquartered in Asia. But KKR won the auction because its offer was the only one with committed financing. This was important 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 that it set up a $300 million pay-in-kind (PIK) 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 PIK note, KKR secured senior debt from seven lenders, including JPMorgan, to the tune of $750 million. Thanks to the PIK note, 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.

In addition to acquiring Oriental Brewery, KKR also inked a partnership agreement with Anheuser-Busch InBev. According to the deal announcement, the companies will share best practices, and in five years, Anheuser-Busch InBev will have the option to buy Oriental Brewery back at an agreed-upon price, indicating that Anheuser-Busch InBev did not necessarily want to part with its subsidiary.

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

The stand-alone aspect is what made the business so attractive to buyout firms, who won’t have to invest much extracting the company’s administrative functions from its conglomerate parent. 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 around capital investments. “This is not a cost-cutting deal for KKR because the company was run very lean given Anheuser-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 practices with Anheuser-InBev, as Oriental Brewery will also license such brands as Hoegaarden and Budweiser.