Glenboden M & A Originations

New targets for Asahi’s acquisitions surge in beverages in Asia

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Origination Status announcement of acquisition of minority (20%) stake, January 2009
Asset Tsingtao Brewery Co. Ltd (China) leading brewer in northern China
Buyer Asahi Breweries Ltd (Japan), no.1 domestic brewing group
Seller Anheuser-Busch InBev SA (Belgium), global no.1 beer group
Buyer Rationale geographic diversification strategy, expansion in China, cash absorption
Seller Rationale debt reduction after merger of InBev and Anheuser-Busch in 2008
NBs Asahi has tipped other Asian countries as next acquisition priorities
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Asahi’s Pesident recently re-iterated his group’s target of a four-fold increase in overseas sales, principally through acquisitions and strategic alliances in Asia and Oceania. Beer, soft drinks and ‘food and health’ are the product areas. Without doubt Asahi will face very stiff competition, especially for beer acquisitions in populous geographies with high consumption growth rates, of which there are many in that region. We look at specific acquisition targets in preferred geographies.

Asahi is the clear market leader in beer in Japan, with about 40% share, and alcohol beverages make up about 70% of the group’s total sales, with the remainder being mostly soft beverages. In recent years, Asahi’s focus has been on re-engineering its existing businesses, to increase profitability, rather than growth; but it started to implement serious acquisitions overseas in 2008.

It’s first two deals have been this purchase of a minority stake in Tsingtao, as well as the contemporaneous acquisition of Schweppes Australia from Cadbury, the no.2 soft drinks producer in that market. Our tip is for the next deals to occur elsewhere - in South Korea, Vietnam and Taiwan.

The Chinese beer market is very fragmented, with the top 10 brewers accounting for less than 50% of the total market, out of a total of about 400 brewers nationwide. Tsingtao is one of the largest, and provides Asahi with an important platform in China. However the group has no path to taking control of Tsingtao, and will have to fight with nearly all of the global majors, as well as its regional competitors, to become a market leader in China. Better for Asahi to focus on other countries perhaps.

The Australian market ? Also quite impregnable for Asahi, but for different reasons. It’s almost a duopoly, shared between Lion Nathan and Foster’s. The former has Kirin, the no.2 in beer in Japan, as its largest shareholder. The latter might come up for sale at some point, but will first need to divest its troubled wine business; besides which other foreign group, like SABMiller, Heineken and even Molson (a minority shareholding in Foster’s), will be further up the queue than Asahi to buy that group.

There are better geographies for Asahi to focus on, to reach its overseas sales target of US$ 2,5 bln. Schweppes Australia gave it $ 500 mln in incremental sales, so there’s only US$ 2 bln left to find.

South Korea’s no.2 beer producer, Oriental Brewery, is in a tender to be sold by Anheuser-Busch InBev. With revenues of about US$ 1 bln, it would take Asahi a long way towards reaching its overseas growth objective. The domestic retail giant, Lotte Group, is said to be the front –runner in the tender process; it’s flush with cash and is already the market leader in soft drinks in South Korea.

However, links between Lotte and Asahi are very strong, and provide the basis for a structured arrangement between them over OB. Since 2004 they’ve had a joint company in that country, Lotte Asahi Liquor, which was previously used as the vehicle for a bid to acquire the Jonro spirits company.

After South Korea, Vietnam looks like the most likely target. With a population of over 80 mln, annual per capita beer consumption of only about 15 litres, but with a growth rate of 15-20%, Vietnam is one of the most attractive beer markets in the world now. Prospects of taking a dominant share in that market are enhanced by the fact that it’s still dominated by a state-owned duopoly; specifically Saigon Beverage Corp (Sabeco), and its northern counterpart, Hanoi Beverage Corp (Nabeco).

These two brewers had been closely held by the Vietnamese state until 2008, when the government sought to sell a 20% shareholding in each company through the domestic stock exchange. A combination of government privatization policy, weak demand from equity markets and huge investment requirements, has caused the Vietnamese state to open up further to strategic investors.

To meet future demand, both Sabeco and Habeco are investing in new capacity, each aiming to hit the 1 bln litre mark by 2010. They will also need to invest huge amounts in marketing and brand development, as their domestic market premiumises. In 2008, Carlsberg took a 16% stake in Habesco, with whom it also has a joint-venture to build a 500 mln litre plant in south Vietnam. The government also seems prepared to sell up to 20% of the other twin, Sabeco, to a major foreign brewing group.

Asahi has already expressed interest in a 10% stake in Sabeco; other suitors apparently include Heineken and ThaiBev. Sabeco is a target worth fighting for; not only would it bring over US$ 600 mln in turnover to Asahi in 2009, but that top line is set to grow very fast given Vietnam’s strong economic growth from a very low base.

Global precedents are very good for strategic minority shareholdings to become controlling ones, in state-owned beer companies, over time. Sabeco and Habeco are likely to take that route.

A more distant target, but one that’s still realistic according to Asahi’s president, is Taiwan Beer, the dominant state –owned brewer in that country. As part of the effort to normalize relations between Taiwan and China, TB successfully registered its trademark in that country, and received a licence to import there at the end of 2008. Not only does Taiwan itself have a population of nearly 25 mln, it also might provide another platform into China for Asahi beside Tsingtao.

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THIS LEAD'S VALUATION
Size (€ mln) 520
Sector beer
Asset Quality China leader branded Tsingtao
Seller large plc
Buyer large plc
P/S 1,5
P/Ebitda 14,2
Type minority stake
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