Glenboden M & A Originations

Is SABMiller overpaying for Kingway breweries in China ?

Priority Rating priority rating 5
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Origination Status buyer and seller announcements, February 2013
Asset Kingway Brewery Holdings Ltd (China), leading beer producer in Guangdong Province
Buyer China Resources Snow Breweries Limited (China), joint-venture between China Resources Enterprise and SABMiller plc
Seller Guangdong Holdings Ltd, public shareholders and management of Kingway
Buyer Rationale increased scale and market presence in Guangdong and other provinces, production capacity
Seller Rationale financial difficulties, acceptable valuation
NBs SABMiller is to acquire seven plants and the Kingway brand, through this deal, and repay debts
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When we last reviewed this upcoming deal a year ago, we predicted a valuation for Kingway of only US$ 250 mln, based in LTM H1 2011 numbers. Since then, sales and profitability have gone south, yet the valuation is vastly north. However from a 'big picture' perspective, we don't think SABMiller is overpaying for this business.

Valuation driven by auction not performance ...Kingway has historically booked low profitability, especially in LTM H1 2012 (see chart). That reflects a general low margin market in China at this time.

Kingway's sales revenue decreased in H1 2012, by some 14%; but its volumes fell by 16% in that period - it looks like the company's been affected not only by price pressures but also by a declining market.

So it's likely that the high price tag for Kingway (see valuation) was influenced by the auction process for the assets, in which not only SAB but also A-B InBev, Tsingtao and Beijing Yanjing are said to have participated at various times.

... but longer-term trajectory and capacity are key ...However SAB is right to claim that consolidation in China is a long-term trend (currently there are about 300 brewers in total) and will lead to greater industry profitability in future.

Also we know from other markets that short term factors in beer, like weak consumer sentiment and poor weather, play an enormous role and can turn around quite quickly, in China as elsewhere.

Plus the longer term growth trajectory should be considered, for China in general and Kingway in particular - over the last 10 years, the company's sales volume has grown by a factor of six.

It should also be remembered that in the beer industry control of capacity is very important, particularly in developing markets; Kingway delivers 14,5 mln hl. of additional production capacity to SAB in China, and that's growing through capex.

... SAB can afford it and has been there beforeTo keep things in perspective, Kingway is a relatively small deal for SAB. According to Fitch Ratings it's small enough to be categorised as only a bolt-on acquisition, unlikely to affect the de-leveraging trajectory that SAB initiated following its December 2011 acquisition of Foster's for cca. US$ 12 bln.

Now an anecdote taken from Glenboden's experience in a previous incarnation. In 1996 we provided an opinion to SAB on the valuation of the Tyskie brewery in south Poland - at that time there was concern that the price tag was too high.

After making our presentations and urging caution, Graham Mackay stared at us, mulling over the market growth potential. His conclusion was, 'I don't think we're offering enough'. So they went and paid more; within five years Tyskie became a business-school-case-study success story for SAB.

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THIS LEAD'S VALUATION
Size (€ mln) 645
Sector brewing
Asset Quality China regional leader branded
Seller state-owned holding
Buyer large plc
P/S 4,1
P/Ebitda 60,0
Type total cash consideration for assets and debt repayment
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