Glenboden M & A Originations

Turkish beer group Efes over-reaching itself in promising Eurasian markets

Priority Rating priority rating 4
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Origination Status CEO statement on results and strategy, April 2009
Asset beer assets of Efes Beverages Group (Turkey), no.1 brewer in Turkey; plus Efes Breweries International, no.4 brewer in Russia and significant in Eurasia
Buyer candidates include Heineken, SABMiller
Seller family and public shareholders of Anadolu Efes AS (holding company)
Buyer Rationale global beer leadership, expansion in growth geographies, synergy
Seller Rationale indebtedness, foreign exchange losses, scale issues overseas
NBs valuation estimate based on Scottish & Newcastle comparable transaction
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In 2008 we predicted that Efes would be the subject of the next global beer consolidation move, after the split up of Scottish & Newcastle. Subsequent events, and the group’s financials in FY 2008, cause us to re-iterate that view, in spite of management talk of more acquisitions. Higher input costs, debt servicing and forex losses have hit its international operations in Eurasia, and there’s a limit to the extent that Efes can continue to milk its near-monopoly in Turkey to fund its overseas ventures.

Efes is a major player in Turkey and other Eurasia …Efes has 17 breweries in 6 countries, over 23 mln hl volume and about US$ 1,4 bln in turnover in 2008. It’s present in fast-growing markets with positive demographics and low per capita consumption. Through EBG, Efes has about 85% share in its home market of Turkey; through EBI it has the no.4 position in Russia, with about 10% market share, as well as significant or leading positions in smaller but fast-growing Eurasian markets (Kazakhstan, Serbia, Moldova, Georgia).

….. but its business model is not well balancedIn 2008 Efes continued to grow strongly, making it attractive as an acquisition candidate. However, this growth is disproportionately driven by price increases; there’s also a mis-match between its super-high profitability in Turkey and losses in overseas markets with weak currencies. These weaknesses make the group vulnerable in our opinion.

In 2008, Efes registered 8% volume growth in total, but a sales value increase of more than 20%. This means that price increases were responsible for more than half of revenue growth, which is not sustainable, at least not in the more competitive international markets that constitute more than 50% of the group’s turnover.

The group’s milking its monopoly position in Turkey …In Turkey, where Efes is effectively the beer monopolist through EBG, its average price increased by 10% in 2008; this allowed the group’s EBITDA margin in that market to grow to nearly 45%, which is extremely high by any food & beverage standard. Politically Efes is at risk of attack, whether the party in power be conservative Moslem or liberal secular.

… while making losses in its other marketsIn its international operations, through EBI, 75% of whose sales are generated by the competitive Russian market, Efes increased prices by over 15% in US$ terms. In spite of this short-termist move, which probably mirrored the market leaders, the group’s EBITDA margin actually decreased, to about 15%, owing to higher input costs and, most likely, operating inefficiencies.

On top of that, debt increases to fund the acquisition of Lomisi in Georgia, and for capex of about US$ 170 mln in Russia and Kazakhstan, as well as forex losses caused by the weakness of Eurasian currencies vs. the US$, meant that EBI made a net loss in 2008.

The group forecasts a contraction in 2009 …As for 2009, Efes forecasts a major slowing of volume growth in total, and even a decline in value growth in EBI. In response, the group intends to cut costs and capex, and to pursue foreign acquisitions, including new geographies. We believe however that Efes would perform better as a consolidated entity, rather than consolidator one, going forward.

…. and is experiencing a worsening debt rating …In balance sheet terms, Efes appears to be safe in its debt servicing, with a net debt ratio of under x1,5 EBITDA (consolidated). However, earlier in 2009 Fitch Ratings revised its outlook for the group, from stable to negative, because of commercial risk in its markets, their weak currency versus the US$ and some refinancing risk.

… and has lost momentum in M&A activityIn M&A track-record terms, after a string of acquisitions and JVs in the early 2000s, Efes seems to have run out of steam. It exited the Romanian market in 2006, by selling its 50% JV stake to its partner in that country, InBev. Then in early 2008 it formed a JV with Heineken for entering the attractive Uzbek market, and for combining existing operations in Kazakhstan and Serbia, thus signaling that it doesn’t have the stomach to tackle those markets alone.

In parallel, the most recent acquisitions made by Efes have been very modest. Its purchase of Lomisi in early 2008, market leader in Georgia, appears impressive, but that brewer only has capacity of about 0,5 mln hl. Later in 2008, Efes bought the Tekel brand in Turkey, for the princely sum of € 2 mln. On top of that, capex in Russia and Kazakhstan have needed complex financing structures.

We think that Efes, or at least EBI, has reached a limit on what it can do by itself, and that Anadolu should sell it while it’s still enjoying a high growth rate. But who could be the buyer ?

Heineken is best placed to acquire EfesAfter the Scottish & Newcastle deal, we suggested that SAB Miller could re-affirm its global leadership by acquiring Efes; Turkey is missing from its geographic coverage, and its position in Russia is not strong enough. However, Heineken might have beaten SAB to it; its JV with Efes looks like an excellent ‘parking’ move, until that group’s able to safely raise enough debt for full acquisition.

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THIS LEAD'S VALUATION
Size (€ mln) 4.600
Sector brewing
Asset Quality Turkey no.1 regional
Seller large private
Buyer large plc
P/S 3,8
P/Ebitda 14,3
Type value estimate
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