Glenboden M & A Originations

Efes ripening as the next global beer consolidation candidate

Priority Rating priority rating 4
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Origination Status deal origination, January 2008
Asset Efes Beer Group (Turkey), no.1 brewer in Turkey and no.4 in Russia
Buyer candidates include SABMiller
Seller family and public shareholders of Anadolu Efes AS (ultimate holding company of EBG)
Financial Terms predicted enterprise value of € 8,1 bln, represents P/S of 5,0 and P /EBITDA of 16,0 (2007E)
Buyer Rationale global beer consolidation, reaction to Scottish & Newcastle acquisition
Seller Rationale timing, capitalization issues going forward
NBs valuation prediction based on Grolsch recent precedent
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After the big global beer consolidation story that was Scottish & Newcastle, and following precedents from the tobacco industry, we can expect a second brewing consolidation to occur during this cycle. EBG is not so huge, but with leading or significant positions in five countries it at least counts as ‘regional’. It’s also ripe for sale, arguably, given a slow-down or even reversal of its acquisition run, as well as financing constraints. It may have reached the limit on what it can do by itself.

We at Glenboden assume that 2008 will mark the peak year in food industry M&A, with corporations doing most of the acquiring rather than private equity. In 2009 things will quieten down, as tightening of credit markets etc. finally take their toll on corporate balance sheets. That means any significant beer consolidation will have to occur this year, or wait another 5 or 10 years for the next cycle.

But why Efes ? With 15 breweries in 5 countries, 20 mln hl. beer volume and € 1,6 bln in turnover, 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, whose big and young population, urbanisation and secularisation processes are very positive for beer growth. Its biggest international market is Russia, where its no.4 position, 9% share and 20% growth rate in 2007 make it a prime consolidation candidate, especially if that market starts to slow down this year. It also has significant or leading positions in other ‘Eurasia’ markets (Kazakhstan, Serbia and Moldova).

But why is Efes more of an acquisition candidate than other substantial regional brewers, like Royal Unibrew for example ? Well, we think that Efes has reached a limit on what it can do by itself, and should sell while it’s still enjoying a high growth rate (about 15% growth in turnover in 2007) and very high EBITDA margin (about 30%).

Having made a string of acquisitions and JVs in the early 2000s, Efes seems to have now run out of steam. Its last purchase was of Russia’s Krasny Vostok, in early 2006. Indeed it appears to have ‘disinvested’ somewhat since then – its last significant M&A move being to exit Romania, by selling its 50% JV stake to its partner in that country, InBev, in the middle of 2006. Consequently, Efes’ growth in 2007 is far lower than in 2006.

Tellingly coupled with the above, news stories and press releases related to Efes, over the last two years, are unusually focused on its financing moves. It acquired Krasny Vostok through raising a big syndicated loan that included 22 banks; later it did a major rights issue; later still it had to get a loan from the EBRD to complete its capacity expansion in Kazakhstan; most recently we hear that the group is consolidating its Russian operations with the help of a planned Ruble bond issue.

But who will acquire Efes ? Possibly SABMiller. After the Scottish & Newcastle break-up, which looks like it’s going ahead after all, SAB will need to re-establish its global leadership. Turkey is missing from its geographic coverage, and its position in Russia is unacceptably weak. Besides which, SAB has historically a lot in common with Efes; they both started out as near -monopolists in their home markets, only SAB’s international expansion was much bolder and truly global.

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