Glenboden M & A Originations

CCU of Chile appears as a full –range beverages acquisition candidate

Priority Rating priority rating 4
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Origination Status proprietary deal origination, September 2008
Asset Compania Cervecerias Unidas (Chile), diversified beverages group in Chile and Argentina
Buyer candidates include both beer and soft drinks majors (esp. Heineken and Coca-Cola)
Seller Inversiones y Rentas S.A. (Chile) and free –float shareholders of CCU
Buyer Rationale to gain major full -range beverages business in significant developing geography
Seller Rationale attractive valuation, timing
NBs Heineken indirectly owns 33% of CCU
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CCU is one of those national businesses, in the developing world, which is a market leader in both beer and non –alcoholic beverages. In Chile, CCU has a weighted market share of 35% in packaged beverages. For some time there’s been an expectation, in the M&A world, that a beer major would make a significant soft drinks acquisition, or vice-versa. We think that CCU is both an attractive candidate in that combined space, and a valid test case for a more global diversification deal one day. Heineken is best placed to acquire CCU, but Coca-Cola has momentum behind diversifying into beer.

CU is the no.1 brewer in Chile, with a market share nearly 90%, and the no.2 brewer in Argentina, with a 16% share there. It’s also the no.1 player in both mineral water and juices & nectars in Chile, with 70% and 55% market shares respectively; plus also no.3 in soft drinks with 25% share.

In terms of sales breakdown, 55% is in beer and 35% in non –alcoholic drinks. So, its fair to say that the group has a very well balanced and comprehensive beverages portfolio.

Financially, CCU is also healthy and growing. Its turnover, in both value and volume terms, has doubled in the last 5 years, with revenue reaching US$ 1,2 bln in 2007. The EBITDA margin is a healthy and steady 25%. In H1 2008, sales revenue and volume grew by 9% and 12% respectively.

As well as CCU having a unique market position, Chile and Argentina are attractive geographies. They have a combined population of 50 mln, and the highest level of urbanization in south America (85% in the case of Chile). Packaged beverages consumption in Chile, at 225 litres per capita, is less than half the level in western Europe or the USA, and has posted a CAGR of 5% in the last five years.

CCU is listed on the NYSE and in Chile. 66% of its shares are owned by a JV vehicle that’s controlled 50:50 by Heineken and Quinenco SA, one of Chile’s largest business conglomerates. So, in theory Heineken’s best placed to acquire CCU; on the other hand it only owns 33% of the shares, and there’s no reason why Quinenco shouldn’t simply sell to the highest bidder, in the event of a divestment.

We see Coca-Cola as a stronger contender for buying CCU. Its evaluation of Foster’s, recently, confirms that it’s seriously considering diversification into brewing, going forward.

CCU would be a relatively safe ‘test case’ acquisition for it, in that space. Its Chilean brewing operations are very low –risk and a cash –cow (delivering 30% of CCU’s revenues but 60% of the groups EBITDA). On the other hand, Coke could really grow CCU’s soft drinks businesses, which are still relatively weak in Chile and non –existent in Argentina or anywhere else.

On the other hand, most of CCU’s revenues come from a stable of local brands (except in soft drinks). This might be unattractive for Coke, and more suitable for a ‘brand collector’ like SABMiller (coming back to beer majors who’ve expressed an interest in diversifying into soft drinks).

We can’t finish without rationale for why CCU might be for sale at this time : the group doesn’t have much appetite for further growth. Expansion into new categories and geographies sits at 6th (last) place in the company’s list of strategic priorities.

The only truly international part of CCU is its wine business, but that constitutes just over 5% of turnover. Also, its M&A activity in the last three years has been limited to small mineral water and fruit juice JVs, with Nestle and Watt’s respectively; the acquisition of a 5% market share brewer in Argentina; and the merger of wine assets.

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