Glenboden M & A Originations

Five more acquisition candidates in the beer industry

Priority Rating priority rating 4
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Origination Status deal origination, August 2008;
Asset beer brands - Foster’s, San Miguel, Duvel, Krombacher, Cobra;
Buyer one or more of – Coca-Cola, Kirin, SABMiller, Heineken, Diageo;
Seller shareholders of Foster’s and San Miguel, family owners of Duvel, Krombacher and Cobra;
Buyer Rationale global beer consolidation, or to expand premium brand portfolio;
Seller Rationale financial situation, timing, competitive issues going forward;
NBs valuation range based on S&N, Grolsch and Eichhof comparables.
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Maybe it’s the summer weather, but a whole crop of acquisition candidates in brewing have appeared on the Glenboden radar screen. Foster’s as the result of a big financial hit taken on its wine business; San Miguel as the consequence of a diversification drive; and Duvel, Krombacher and Cobra because of the cost and opportunity of internationalizing their premium offerings. Foster’s case is the most dramatic, and supports Glenboden’s repeated view that ‘global premium wine portfolios’ are still a mistake; while Krombacher offers the biggest and ripest opportunity for you, we think.

Foster’s recently announced a corporate overhaul, caused by a A$ 800 mln write-down in its underperforming wine business. This is a sad irony for those who remember Foster’s proud announcement, after its acquisition of Southcorp in 2005, that it had created ‘the leading global premium wine business’. Glenboden has consistently spoken about the perils of ‘depremiumisation’ in the fragmented global wine business, especially in our reviews of deals involving Constellation Brands in the US. Of course we feel quite vindicated, now. But seriously, if Foster’s can’t succeed in that space, with its stellar portfolio of Australian and Californian brands including Penfolds, Lindemans and Beringer, then nobody can. Coca-Cola recently turned down the chance to make a bid for Foster’s, at least at the price wanted, adding that wine and beer businesses don’t go well together. ‘Wine on beer makes you queer’, as teenagers used to say. It looks like Foster’s will now have to sell at a discount or, more wisely, divest its wine business and revert to being a strong international beer group.

San Miguel Corporation, the Philippines conglomerate, has suffered margin pressures in its food and packaging businesses, and is keen to diversify into utilities. In order to fund this, it spun –off and separately listed its domestic beer business, San Miguel Breweries, earlier this year. Only about 5% of the stock has been offered so far, and SMC has announced its intention of retaining 51% into the long –term. This means at least 33% should be available for a strategic alliance with another beer group. The leading contender is probably the Japanese giant, Kirin, who already co-operates closely with San Miguel in south –east Asia. It will also be interesting to see if San Miguel Beer International ltd. will be separately treated to San Miguel Breweries plc.

Krombacher is the market leading pils beer in Germany, and an ambassador for that category in export markets. However, beer sales in its domestic market were flat in 2007, and even declined in the case of its flagship brand, Krombacher Pils. Export sales grew by 6% last year, and the brand is present in nearly 50 countries, but still less that 5% of total revenue is derived outside Germany. There’s a textbook opportunity, therefore, for Krombacher to enter the premium portfolio of a big brewer that’s able to internationalise it. Apparently a member of the Shadeberg family, which owns the brand, has been in discussions with Heineken recently. But it might not be too late for you.

Duvel is market leader in specialty beers in Belgium, and claims to be the global brewer of reference for blond, bottle conditioned, high fermentation beer. Most of its >15% sales growth in 2007 came from exports, which now constitute over 50% of total revenues. However, margin pressures are hampering the company’s internationalization strategy which, as with Krombacher, could be better managed by a big group, say SABMiller who did a similar thing recently by buying Grolsch. Although Duvel is publicly listed, the majority of shares are controlled by the Moortgat family.

Finally we have Cobra beer, an entrepreneurial Indian brand started up in the UK in 1989. It sees international opportunities for its concept, and is in negotiations with Diageo to sell a 30% stake.

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