Glenboden M & A Originations

More signs that Efes is ripening as global beer consolidation target

Priority Rating priority rating 4
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Origination Status deal origination, June 2008;
Asset beer assets of Efes Beverages Group (Turkey), no.1 brewer in Turkey and no.4 in Russia;
Buyer Heineken ? ;
Seller family and public shareholders of Anadolu Efes AS (ultimate holding company of EBG);
Buyer Rationale global beer consolidation, to become global no.1 brewer;
Seller Rationale timing, capitalization issues going forward;
NBs valuation estimate based on Scottish & Newcastle comparable transaction.
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We’ve predicted a second major global beer consolidation move, this year, after the split up of Scottish & Newcastle and following precedents from the tobacco industry. EBG has leading or significant positions in six countries in fast –growing Eurasia. In January Glenboden argued it was getting ripe for sale and, in spite of its acquisition of Georgia’s no.1 brewer Lomisi in February, we still believe that. Curiously, however, it looks like SABMiller might lose this prize to Heineken, who’s got its foot into the Efes door through a clever JV structure in some of EBG’s key markets.

First let’s re-cap on why EBG is an attractive acquisition target. With 17 breweries in 6 countries, over 20 mln hl. beer volume and nearly € 1 bln in turnover last year, it’s a substantial business from which a lot of synergy can be wringed. Moreover, it’s present in fast-growing markets with positive demographics and low per capita consumption. It has over 80% market share in Turkey, where EBG’s sales volume grew by 23% in Q1 2008. Its biggest international market is Russia, where it has the no.4 position, 10% share and 14% volume growth in Q1 2008. It also has significant or leading positions in other fast-growing Eurasian markets (Kazakhstan, Serbia, Moldova, Georgia).

Having made a string of acquisitions and JVs in the early 2000s, Efes seems to have run out of steam; indeed it’s been a net disinvestor since then. It exited the Romanian market in 2006 by selling its 50% JV stake to its partner in that country, InBev. More significantly, at the beginning of this year it formed a joint venture with Heineken for entering the attractive Uzbek market, which it clearly feels it can’t do alone, and for combining existing operations in Kazakhstan and Serbia. EBG’s acquisition of Lomisi earlier this year, market leader in Georgia, is arguably the exception that proves the rule – it sounds impressive, but that brewer only has capacity of 0,55 mln ha, so the deal can’t have been expensive.

We still think that EBG has reached a limit on what it can do by itself, and should sell while it’s still enjoying a high growth rate (about 16% beer volume growth in Q1 2008). It’s debt burden is growing and is a major strain on profitability – net profit fell by 9% in spite of double -digit growth in EBITDA. How much longer can EBG continue to milk its Turkish beer dominance, through price increases, in order to fuel its international expansion and to carry the related debt burden ?

But who will be the buyer ? In January Glenboden suggested that after the S&N deal, SAB Miller will need to re-affirm its global leadership. Turkey is missing from its geographic coverage, and its position in Russia is not strong enough. However, Heineken has beaten SAB to it; the JV with EBG looks like an excellent ‘parking’ move, until Heineken’s able to safely raise enough debt for full acquisition.

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