AB InBev plays safe with $5.8 bln Korean reunion

HiteJinro

20/01/2014 10:14

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.) By Una Galani HONG KONG, Jan 20 (Reuters Breakingviews) - Anheuser-Busch InBev  ABI.BR  is playing it safe in its reunion with South Korea's Oriental Brewery. The beer giant is paying $5.8 billion to buy back the business it reluctantly sold in 2009 when it needed to raise cash. The valuation is low enough to justify re-entering Asia's least frothy beer market- and eases the shame of writing a big cheque to private equity owners KKR  KKR.N  and Affinity Equity Partners. The maker of Stella Artois and Budweiser has had a costly absence from South Korea. The headline purchase price for OB is more than three times what it pocketed from the sale in 2009. In the interim, KKR and Affinity turned the brewer into South Korea's leading suds maker, lifting its share of the market to over 50 percent and growing EBITDA at an annualised rate of 20 percent. The buyout firms are being rewarded with an annualised return on their investment of more than 40 percent. Yet AB Inbev's return would have been more expensive had it not retained an option to buy back the business at a pre-determined multiple. Subtract the $320 million of cash that it will receive as part of a value-sharing agreement and the brewer is paying 11 times EBITDA. OB now has an operating profit twice as large as its nearest rival, Hite Brewery, according to Bernstein research. Yet parent Hite Jinro  000080.KS  trades on 12.7 times 2013 EBITDA, according to Eikon. The relatively attractive valuation and AB InBev's ability to finance the deal without stretching its net debt much beyond two times EBITDA help to make up for South Korea's sluggish growth prospects. The group admits the country's beer market will grow by just 13 percent in the next decade, though premium brands should do better. Meanwhile, the reunion will boost the overall profitability of AB InBev's Asian portfolio, which is dominated by China. The People's Republic is by far the world's biggest beer market and AB InBev is the third-biggest brewer by volumes. But margins for all players are thin. Adding OB will almost double the share of EBITDA contributed by Asia Pacific to 5.6 percent, based on the annual figures for 2012. For a relatively safe and low-key reunion, that's worthwhile. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: www.breakingviews.com/TOPNewsSubscription ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> CONTEXT NEWS - Anheuser-Busch InBev announced on Jan. 20 that it would reacquire South Korea's Oriental Brewery from private equity groups KKR and Affinity Equity Partners for $5.8 billion. - Under the terms of the agreement that AB InBev entered into with KKR and Affinity in 2009, AB InBev will also receive a cash payment of $320 million as part of a value-sharing agreement.  - The deal values Oriental Brewery at almost 11 times its 2013 EBITDA, which the South Korean group estimates at $500 million.  - Private equity group KKR agreed to buy Oriental Brewery for $1.8 billion in May 2009 to help AB InBev repay the debt it took on when it bought Anheuser Busch. The deal, which valued the brewer at around nine times EBITDA, gave AB InBev the right but not the obligation to buy back the brewery after five years. - KKR financed the deal using $750 million of its own equity, a $300 million payment-in-kind loan from AB InBev with an interest rate of 8 percent, and the rest in regular loans. The PIK loan was repaid a couple of years ago, according to a person close to the transaction. - In July 2009, KKR sold half of the equity in the brewer to Affinity.  - The market for premium beers in South Korea grew roughly 10 percent per year between 2009 and 2012. The country's total beer market is expected to grow by a total of 13 percent during the next decade, AB InBev said. - Reuters: AB InBev to regain grip on S.Korea brewer OB for $5.8 bln  ID:nL3N0KT087  RELATED COLUMNS Bar room brawl  ID:nL3N0JS1NJ  Korea high  ID:nL3N0JO0UH  - For previous columns by the author, Reuters customers can click on  GALANI/  (Editing by Peter Thal Larsen and Sarah Bailey) ((una.galani@thomsonreuters.com))     ((Reuters messaging: una.galani.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS ORIENTAL BREWERY