Glenboden M & A Originations

Labour troubles at Oriental Brewery create opportunity for private equity buyers

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Origination Status company statement on status of tender, April 2009
Asset 40% shareholding in Oriental Brewery (South Korea), no.2 domestic brewer
Buyer bidders are Affinity Equity Partners, Kohlberg Kravis Roberts, MBK Partners (private equity firms)
Seller Anheuser-Busch InBev (USA), global no.1 brewer (majority owner)
Buyer Rationale restructuring opportunity, clear exit to strategic investor
Seller Rationale to reduce debt after InBev acquisition of Anheuser-Busch
NBs no strategic investor has made a final offer for OB
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There’s been confusion or misinformation about this deal in the media. Our reading is that InBev is only selling a minority stake, since it wants to retain its no.2 market position in the big and profitable South Korean market. This partly explains why only private equity has bid for such an attractive asset. However, the ground is laid for an alliance between InBev and one of the big Japanese brewers, once OB’s labour problems have been sorted out, and the private equity investor secures his exit.

OB is a very attractive acquisition candidate for global brewers …OB had sales of about US$ 600 mln in 2008, and an EBITDA margin of over 20%. It has 40% of the South Korean market, a country of nearly 50 mln inhabitants and per capita beer consumption of over 40 l. p.a. OB shares this market as a duopoly with Hite Brewery, a public company. If a majority stake was being sold by InBev, then surely every global beer company would have made a bid ?

…. but only a minority stake seems to be on offerThe fact that a big domestic retailer, Lotte, as well as the Japanese beer giants Asahi and Kirin, were prominent in making initial offers for OB, underlines that InBev cannot be selling a controlling stake.

As a retailer, Lotte has a lot of cash to invest, but no expertise in managing a beer business. As for the Japanese brewers, they’re known for taking strategic but minority shareholdings in foreign companies; one example is the 20% stake in China’s Tsingtao, bought by Asahi from InBev earlier in 2009.

Forex and labour issues have discouraged strategic investors ….Apparently, valuation differences have prevented the above bidders from making final offers. That’s been exacerbated, no doubt, by the fact that the Korean won has devalued against the US$ by about 35% in the last year. A bigger reason however may be the labour relations problems at OB.

OB’s unionized workers, representing 80% of the total, are on strike demanding a 15% pay rise and that 10% of the sale proceeds be re-invested in the business.

…. who don’t want contagion or political problemsThis makes the company very unattractive for the interested strategic buyers. Lotte doesn’t want contagion of the dispute to its own workforce in South Korea; the Japanese brewers by nature don’t like labour problems, and certainly don’t want to enter into such a conflict with their Korean neighbours.

This is an ideal scenario for opportunistic private equity investors …This has created a window of opportunity for the private equity bidders. Their strategy must surely be to buy the 40% stake at a reasonable price, from an InBev that, despite its statements to the contrary, needs to raise cash sooner rather than later.

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THIS LEAD'S VALUATION
Size (€ mln) 460
Sector beer
Asset Quality no.2 Korea minority stake
Seller large plc
Buyer private equity
P/S 2,5
P/Ebitda 12,0
Type value estimate
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