Glenboden M & A Originations

Opportunities after wholesale acquisition of InBev CE by private equity

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Origination Status joint announcement of transaction agreement, October 2009
Asset ABI's brewing operations in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia
Buyer CVC Capital Partners (UK), private equity firm
Seller Anheuser-Busch InBev SA (Belgium), global no.1 beer group
Buyer Rationale wholesale purchase of leading local beer brand portfolio in central Europe
Seller Rationale focus on core geographies and strategic brands, debt reduction, timing
NBs ABI is now the 'largest and most profitable beer company in the world'
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Clearly ABI couldn't sell its central Europe portfolio to a single strategic buyer, so opted for its wholesale to CVC, who has experience in such deals. Going forward, however, brewing is not a sector where private equity thrives, and for several reasons we think CVC will disaggregate the portfolio and sell the country units to other beer groups looking to consolidate those markets.

ABI rationale for exiting CE is strong ...Strategically the sale makes sense for ABI. With Russia and Ukraine excluded from the deal, the business being sold represents less than 5% of the group's total volumes.

Moreover, ABI is increasingly focused on a dozen or so global and focus brands, which constitute 65% of turnover and growing. Unlike other beer majors, notably SABMiller, they're not so keen on purely national brands.

Then there's the margins argument. ABI CEE delivered an EBITDA margin of under 25% in H1 2009, and even below 20% in 2008, when ABI's group average is 33% (largely thanks to Budweiser in the US).

... and the group has compelling financial reasons for speedMost pressingly, ABI has to reduce debt and achieve synergies fast, after the merger between InBev and Anheuser-Busch, to get back to investing seriously in its operations.

The group has already announced that, for example, capex will be reduced by US$ 1 bln in 2009; they will want to reverse this situation as soon as possible, since brewing requires a lot of investment in order to stay competitive.

For these reasons it's understandable that ABI has opted to 'wholesale' the portfolio to a private equity group, rather than do the onerous work of disaggregating the country units itself, and selling each one separately to the other beer majors.

Wholesale of ABI CE to CVC follows precedents ...CVC has experience in this type of wholesale deal. When it acquired the Leaf confectionery business from CSM, in 2004, that also included a portfolio of local brands spread across various European geographies. CVC has held onto, and helped to grow most of that portfolio, for five years now.

... but CVC might re-sell quickly ...In the case of ABI central Europe, however, given the specifics of the beer industry, we don't think CVC will have the luxury of time, and will need to sell off the country units quickly to avoid losing value.

Brewing, unlike confectionery, is a business that requires major investment in order to stay competitive. There's a capex cycle that needs to be respected, not to mention huge marketing outlays.

... since CVC also needs to reduce debt ...The buyer will need to use cashflow to repay the large debt that it inevitably raised to fund the acquisition of ABI CE.

The valuation in this deal is hard to estimate, because Russia and Ukraine are excluded from it. But if we assume that the one-third of total volume, represented by the CE portfolio, is reflected in sales value also, and that the EBITDA of the sold portfolio is at the CEE average of 25%, then we arrive at an EBITDA multiple range of x12 to x16 (latter in the event of upside targets being achieved).

That's compatible with comparable beer transactions, and is likely to entail that CVC's net debt ratio, for this investment, is high and will need to be reduced quickly. That alone could mean quick asset sales, starting with the 'lowest hanging' country units.

... whereas the business will need investmentOn top of that, the business being acquired by CVC seems to already have been 'milked', by ABI. That's evidenced by discrepancies between volume and value /margin performance, in FY2008 and H1 2009. Those can't continue for long.

ABI CEE's sales volume declined by 6% in FY2008 and 7,5% in H1 2009. Stripping out the Russian business, where volumes fell by 12% in both periods, the volume of the sold CE portfolio is flat or just slightly negative.

Set against that, we have sales value growth of about 5% in both of the above periods, and EBITDA margin growth from under 20% to nearly 25% in H1 2009.

ABI has accredited this growth to 'price and mix changes'; that suggests the portfolio is being milked rather than invested in, especially when the impact of international premium brands is unlikely to be significant next to the dynamics in the local brands in that region.

CVC may disaggregate and sell the country units ...So, following the above lines of argument, we believe that CVC will, sooner rather than later, disaggregate the country units in ABI CE and sell them separately to beer majors that (i) are ready to invest in them, (ii) value the local brands that are in the portfolio, and (iii) benefit most from consolidation in the respective geographies.

... to the other beer majors in the regionThe sold portfolio is a top 3 player in each of the seven CE countries in which it has brewing operations; that makes it a 'no -brainer' consolidation case.

On that basis, we believe the most likely buyers to be : Carlsberg (Bulgaria, Croatia, Serbia), Heineken (Czech Republic, Hungary), SABMiller (Romania).

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THIS LEAD'S VALUATION
Size (€ mln) 1.500
Sector brewing
Asset Quality CE no.3 branded
Seller large plc
Buyer private equity
P/S 3,0
P/Ebitda 12,0
Type transaction value estimate
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