Glenboden M & A Originations

Potential buyers for AB Inbev's beer assets in CEE region

Priority Rating priority rating 1
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Origination Status press reports, June 2009
Asset central European beer assets of AB Inbev
Buyer candidates include SABMiller, Heineken, Carlsberg
Seller Anheuser-Busch InBev SA (Belgium), global no.1 beer group
Buyer Rationale market share and critical mass in core and adjacent geographies
Seller Rationale debt reduction after merger, divestment of non-core geographies
NBs AB InBev has targeted US$ 7 bln total proceeds from divestments
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After the Oriental Brewery and Tsingtao deals, AB InBev could reach its target of US$ 7 bln from divestments, if it sells its CEE businesses. Central and Eastern Europe constitutes less than 10% of total sales now, and is in decline; on the other hand the group owns leading brands in several markets there, which should be attractive for the other global majors looking for consolidation opportunities.

InBev needs one more big divestment ...InBev had net debt of just over US$ 40 bln, at the end of 2008; its pro forma EBITDA, including Anheuser-Busch, was about US$ 8 bln in that year. That gives a net debt multiple of x5, which is relatively high even by brewing standards.

By reaching its target of US$ 7 bln from divestments, the group will reduce its net debt to about x3,5 EBITDA in 2009. With about US$ 2,5 bln raised from the sale of Oriental Brewery in South Korea plus the group's 25% stake in Tsingtao in China, AB InBev needs to secure US$ 4,5 bln from additional asset sales.

... with its CEE business being the obvious candidate ...But why Central and Eastern Europe as the next exit ground ? We believe that there are good reasons, financial and strategic, for such a decision.

In strictly financial terms, the sale of the CEE business might allow AB InBev to reach its US$ 7 bln target, without any further disposals beyond that. Extrapolating Q1 2009 data to FY 2009, and employing an EBITDA multiple of 14, which is reasonable considering the potential buyers and synergies, the proceeds from the sale could roughly equal the US$ 4,5 bln shortfall.

... having become non-core since the merger with ABStrategically, and through InBev's purchases going back to the mid 1990s, the group has leading market positions and brands in several CEE countries, including Russia, Ukraine, Czech Republic and Romania.

However, that region is undoubtedly non-core for the new AB InBev. In Q1 2009, the first period of joint performance after the merger, CEE constituted less that 10% of total revenues.

Although sales increased by 10% in value terms there, they were down by 5% in volume. This suggests that price increases have been milking those businesses; sure enough, EBITDA doubled in CEE in that period.

However, at only 18% of sales, the group's EBITDA margin in CEE is still only half of the group's global average of 34%. So, competitive pressures are clearly stifling for InBev in that region.

These are all signs that the press reports, concerning the sale of AB InBev's CEE assets, are well grounded at least in terms of fundamentals.

But what's the quality of those assets, and who are the most likely buyers ?

Russia and Ukraine are the most attractive markets ...The jewel in the crown is clearly Sun InBev, which enjoys the no.2 market position in Russia and the no.1 in Ukraine, with 20% and 40% shares respectively. Together, these countries deliver two-thirds of the group's overall sales volume in CEE.

Although volumes are in decline there, in both 2008 and Q1 2009, those assets are clearly very attractive strategically for lesser players in those markets, in particular SABMiller and Heineken. Brands include Siberian Crown in Russia, and the no.1 brand in Ukraine, Chernigivske.

... with Czech and Romania enjoying strong consolidation pressure ...In the Czech Republic, with its huge per capita consumption of 160 litres per capita, InBev is the weak no.2 player, with 15% market share and way behind SABMiller. It's only slightly ahead of Heineken, whose painstaking acquisitions of Krusevice in 2007, and of Zlatopramen in 2008, show that it's still ambitious in the Czech market, in spite of its weak position there so far.

Undoubtedly, Heineken would be keen to acquire the Staropramen and Branik brands from InBev, which would enable it to become the strong no.2 player in the iconic Czech market.

In Romania, with its relatively large population but low beer consumption (60 litres per capita), InBev is the joint no.2 player, alongside SABMiller, with about 20% market share. That puts them both far behind the market leader, Heineken.

If SABMiller were to acquire InBev in Romania, to combine the latter's Bergenbier with its Ursus brand, then it would challenge Heineken for the no.1 spot in that prospectful market.

... and four other markets providing the tailIn Bulgaria, InBev is the strong no.2 player, behind Heineken, with about 25% share, and its main brand being Kamenitza. Carlsberg could leap into first place, in that market, if it were to acquire that business.

In Hungary, InBev is in joint second place, with 25% share, alongside Heineken with Brau Union. Its main brand is Borsodi Sor in that market. Heineken could leapfrog SABMiller , to the no.1 spot in Hungary, if it bought that asset.

InBev is also the clear market leader in two smaller Balkans markets, Croatia and Serbia Montenegro. It may be that the no.2 or 3 players in those countries, notably Heineken and Carlsberg, might want to mop those assets up.

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THIS LEAD'S VALUATION
Size (€ mln) 3.500
Sector brewing
Asset Quality CEE leader branded
Seller large plc
Buyer large plc
P/S 2,5
P/Ebitda 14,0
Type value estimate
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