Glenboden M & A Originations

M&A options for SABMiller in Belarus and Ukraine

Priority Rating priority rating 4
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Origination Status buyer announcement, July 2010
Asset 17% of the share capital of OAO Olivaria (Belarus), no.2 domestic beer producer
Buyer Carlsberg A/S (Denmark), global no. 4 beer producer
Seller entities and individuals
Buyer Rationale increase stake jointly held with EBRD from 51% to 68%
Seller Rationale acceptable valuation
NBs EBRD owns 21% of the shares of Olivaria
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In spite of it not being a free -market democracy, Belarus' beer industry is already being carved up among the global brewing majors. Only the fate of the market leader, Krinitsa, remains to be decided. We look at whether SABMiller will have any competition to buy it, and at an alternative acquisition for the group that would also transform its business in neighbouring Ukraine in one go.

Two global majors already present in Belarus ...Heineken and Carlsberg are well established in Belarus (see chart). Heineken effectively has about 15% market share, through the two breweries that it owns, putting it in the joint no.2 spot with Carlsberg, in terms of domestic brands.

Overall Carlsberg claims to be the no.1 player in Belarus, since over half of the imported beer is 'Baltika' brand, from Russia, which the group owns. That would take its market share to around the 30% held by state -owned Krinitsa.

... Krinitsa privatisation end game ...Elsewhere in CEE, the 'end -game' in beer is a market dominated by local brands, split up between three of the global majors, jointly controlling e.g. 67% of the market.

Assuming the same occurs in Belarus, then the only significant thing left to happen is for Krinitsa to be sold to one of those majors.

Olivaria already coveredOn the face of it, there could still be a battle over Olivaria, as Carlsberg owns less than 50% of its share capital.

In practice however, as the friendly EBRD bank owns a further 21%, Carlsberg's latest share purchase (see valuation and details) takes its effective control of Olivaria from 51% to 68%.

Lidskoye a different animalThere's also an anomaly in the market; that of the no.3 domestic producer, Lidskoye, which is owned by a little -known independent from Finland, Olvi.

But Lidskoye, like its parent Olvi, is a 'full -beverage' company producing not only beer but also soft drinks and bottled water. For that reason it stands apart from the mainstream beer industry, and might not be the subject of further M&A.

... SABMiller the prime contender for Krinitsa...So, in M&A terms, it's now all about who will acquire the market leading brand in Belarus, Krinitsa; the Belarus State has a shareholding of over 80% in it, managed through the domestic Priorbank.

The obvious candidate is SABMiller, for whom Belarus is a hole in their global map. SAB has already been tipped as a buyer; but will it have a free run ?

... A-B InBev not interested ...Although Anheuser-Busch InBev withdrew from most of CEE in 2009, when it sold all its brewing operations in that region to CVC Capital, that deal excluded InBev's businesses in eastern Europe (specifically Russia and Ukraine).

So in theory that group could challenge SAB over Krinitsa. But InBev now prides itself on being 'the most profitable beer company in the world', with an increasing focus on large geographies that provide the highest financial returns.

Belarus, with its population of only 10 mln, doesn't meet that criterion, in spite of its major growth potential (per capita consumption of only 45 l.p.a. compared with e.g. 90 l.p.a. in Poland).

... Heineken wants to avoid being no.3We believe that only Heineken might challenge SAB over Krinitsa. Its existing share of that market, in spite of owning two major brands there, is only about 15% and, should SAB buy Krinitsa, it would be pushed into a weak no.3 position.

Maybe Heineken wouldn't want to manage a third brewery in such a small country ? But if we look at the Czech Republic, which also has a population of only 10 mln, that group operates three breweries there also.

SABMiller could solve two markets with Obolon buyIf the Belarus Government continues to delay the privatisation of Krinitsa, then SABMiller has another acquisition option, that could allow it to both gain an acceptable market share in Belarus, and achieve market leadership in neighbouring Ukraine, through one deal.

Not only does SAB have a tiny presence in Belarus, but also its share of the far larger Ukrainian beer market, with its population of 50 mln, is only around 5% (through Sarmat, acquired in 2008).

The 'national champion' in Ukraine is Obolon, which has a 30% share of that market. Obolon is also the no.2 imported brand in Belarus, after Baltika, and has a long tradition there.

With imports accounting for over 30% of beer sales in Belarus, Obolon could provide a satisfactory presence for SAB in that country, as well as leadership in the more important Ukraine.

Obolon is currently owned by its employees; worker -owned companies usually succumb to acquisition pressure from big companies, eventually.

Low undemocratic valuations ...As a footnote, we draw attention to valuations in the Belarus beer market. Data is very hard to find but, if Carlsberg is able to acquire that country's no.2 domestic producer at a valuation of around € 30 mln, then that's very cheap.

It shows what happens in a state that isn't a free -market democracy, and so fails to privatise its industries through competitive tenders.

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THIS LEAD'S VALUATION
Size (€ mln) 30
Sector brewing
Asset Quality Belarus no.2 branded
Seller entities & individuals
Buyer large plc
P/S n/a
P/Ebitda n/a
Type value estimate based on minority stake purchase
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