Glenboden M & A Originations

Kingway Brewery likely to be sold to SABMiller

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Origination Status market rumours of a bid, February 2012
Asset Kingway Brewery Holdings Ltd (China), leading beer producer in Guangdong Province
Buyer A-B InBev and SABMiller reported to be considering a bid
Seller Guangdong Holdings Ltd, public shareholders and management of Kingway
Buyer Rationale market share in wealthy Guangdong province, volume growth
Seller Rationale financial problems, timing
NBs Heineken-APB held a 21% stake in Kingway until May 2011
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It's rumoured that state-owned Guangdong Holdings, facing financial problems, is to sell Kingway Brewery, and that both SABMiller and A-B InBev are preparing bids. Although Kingway has relatively low margins by brewing standards, the timing is good given the group's strong growth trajectory in an affluent part of China.

Margins low but improving ...Kingway's EBITDA margin is low by beer standards (see profile), which may derive from its focus on long shelf-life beer (360 days) for the mainstream market segment.

At the same time the trajectory is positive - in H1 2011 the group's net sales grew faster than cost of goods sold (14% versus 12,5%), in spite of materials' costs pressures.

Kingway also booked a near 10% decrease in its selling and distribution costs, in spite of volume growth of 7,5%, in that period.

... strong growth in a large market ...China is now the largest beer market in the world, in spite of having per capita consumption of less than half of that in the US, the world's second larget beer market.

Kingway's growth is impressive, with volumes nearly doubling in the five years to 2010, when they reached 9,25 mln hectolitres.

The company is also investing heavily, to grow capacity to 25 mln hectolitres in eight modern breweries, and a plan to sell more than 20 mln hectolitres of beer as early as 2014.

... still fragmented market structureThe top six brewers in China produce under 60% of the nation's beer, which by western standards suggests consolidation still has a way to go. There is also a long 'tail' of about 300 breweries in total.

A-B InBev has expressed interest in a deal with Kingway. SABMiller's joint-venture with China Resources Enterprise, CR Snow Breweries, is also said to be preparing a bid.

According to analysis by Sanford Bernstein, buying Kingway would give A-B InBev clear leadership of Guangdong Province's beer market. Kingway has a 9% volume share, with A-B InBev level with Zhujiang (independent) on 20%.

Meanwhile, a deal for CR Snow would hand the brewer a much-needed lift against more powerful rivals in the region. CR Snow has a volume share of 5% in Guangdong, based on 2010 figures. We think that SABMiller's stronger determination in developing markets will clinch the deal for them.

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THIS LEAD'S VALUATION
Size (€ mln) 210
Sector brewing
Asset Quality China regional branded
Seller state-owned holding
Buyer large plc
P/S 1,25
P/Ebitda 12,0
Type enterprise value estimate
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