Anheuser-Busch InBev SA <ABI.BR>, the world’s largest brewer, has agreed to buy South Korea’s Oriental Brewery Co Ltd (OB) for $5.8-billion including debt, regaining ownership of a key Asian asset at a time of strong industry growth across the region.
The sale by KKR & Co <KKR.N> and Affinity Equity Partners represents Asia’s biggest ever private equity sale via M&A in dollar terms, rewarding them with returns of more than five times their investment. OB had total debt of $922-million at end of 2012, according to the company’s latest available figures.
With the deal, AB InBev gains not only a South Korean brewer that has rapidly grown to command 60 per cent market share but also distribution channels for its own brands such as Budweiser and Stella Artois that have room to grow in an underdeveloped premium beer segment.
“OB will strengthen our position in the fast-growing Asia Pacific region and will become a significant contributor to our Asia Pacific zone,” Carlos Brito, Chief Executive Officer of AB InBev said in a statement. AB InBev also said it hopes to export OB brands more widely.
The deal comes one week after Japan’s Suntory Holdings agreed to buy Beam Inc <BEAM.N> for $13.6-billion, with the transactions underscoring rapid consolidation in the global liquor industry.
Carlsberg <CARLb.CO>, Heineken NV <HEIN.AS> and SABMiller Plc <SAB.L> 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.
Leuven, Belgium-based AB InBev sold Oriental Brewery in 2009 for $1.8-billion to KKR, as part of its efforts to ease the debt burden incurred in the $52-billion acquisition of U.S. beer maker Anheuser-Busch by InBev a year earlier. KKR agreed to pay around $800-million in cash for OB and the rest in debt, later splitting the cash portion with Affinity roughly in half.
AB InBev has a relatively small presence in Asia Pacific, with the region accounting for 14.3 per cent of the 403 million hectoliters of beer it sold and 2.5 per cent of its $15.5-billion in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2012.
AB InBev retained an option to buy back OB within five years from the date of the 2009 sale. The decision to strike a deal well before the deadline in July underscores the hot competition for brewing assets in the region.
“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 familiar with original deal said.
Under its private equity owners, OB cut costs, increased cash flow and gained market share to become South Korea’s biggest brewer. At the end of 2013, OB had an estimated $500-million in EBITDA, a core measure of cash flow, 2.3 times bigger than when they aquired it and 25 per cent higher than last year, the statement added.
Led by Chang In-soo, a CEO who has aggressively restructured, OB has seen solid growth in its main beer label Cass, and annual double-digit growth for two new brands including Cass Light, lifting its market share to 60 per cent market from 40 per cent in 2009.
But there is still room for growth. South Korea is a semi-developed beer market, with some 40 litres drunk annually per capita, on a par with China. Consumption is expected to grow at around 2 per cent per year, though that is much lower than the stellar growth forecasts for China and Vietnam.
In particular, the premium segment is well below 10 per cent of the overall beer market, compared with at least 20 per cent in developed western European and North American markets.
The South Korean market offers is duopoly – OB along with Hite Jinro <000080.KS> controls 90 per cent of South Korea’s beer market. That is a comforting factor for AB InBev, as it is relatively easier to raise prices and make tidy profits – a similar market to those of France or Spain.
AB InBev has also been keen on South and Central American growth and last year it acquired its remaining shares of Mexico’s Modelo Grupo for $20.1-billion.
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, 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.
Rapid growth in Asia’s beer market has drawn global brewers seeking to offset sluggish sales in mature markets and as a result, beer-related M&A in Asia has commanded rich premiums. Heineken NV paid $6.4-billion for control of Tiger beer maker Asia Pacific Breweries Ltd in 2012, translating into a multiple of 35 times earnings.
Citigroup <C.N> and Morgan Stanley <MS.N> advised KKR and Affinity, according to a source familiar with the matter.