Anheuser-Busch InBev; market cap as of 13/02/2016: $187.70bn
Asahi Group Holdings Ltd; market cap as of 13/02/2016: $20bn

Anheuser-Busch InBev NV said it has received a binding offer valued at about $2.9 billion in cash from Japan’s Asahi Group Holdings Ltd. for the Peroni and Grolsch brands. The sale is contingent on the successful completion of the SABMiller/AB InBev deal (Megabrew) and would represent the largest acquisition by a Japanese beverage company abroad since the purchase of Jim Beam by brewer Suntory.

About Anheuser-Busch InBev

AB InBev is a major brewing company based out of Belgium. The company operates in more than 100 countries worldwide and employs over a hundred thousand people. As a result, AB InBev is the largest global brewer; controlling a quarter of global market share and generating $47.1 billion total sales. The company has built itself up over the years through a series of M&A activity led by 3G Capital, the largest shareholder of the company. These acquisitions have culminated in a portfolio of more than 200 brands with 16 of these exceeding sales figures of $1 billion such as Corona, Skol, Brahma and Budlight. Despite this, the company has managed an organic growth rate of 5.9% which excludes the impact of currency movements and M&A activities.

AB InBev has been an outstanding player in the industry achieving a 60% gross margin, 32% EBIT margin and a 20% profit margin: all attractive figures to shareholders.

About Asahi

Founded in Osaka in 1889 as the Osaka Beer Company, and originally employing German prisoners of war from the first world war, Asahi Breweries is the largest brewing company in Japan, controlling approximately 38% of the market share; only slightly larger than its next closest competitor: Kirin. Asahi operates breweries in 11 countries and has offices in many more nations around the world. Asahi Group also owns and distributes several other brands in the beverages industry including coffee, tea and water brands. In 2015 Asahi had net Sales of 1,857,418 million yen ($16.4bn) and a gross margin of 37.76%.

“Megabrew”

In October of last year, Anheuser-Busch InBev agreed to purchase SABMiller, for almost $106bn, making it not only the second biggest deal of 2015, but the third biggest deal in history. Because of the sheer immensity of the new consolidated entity, the deal has already gained attention of the media and anti-trust authorities.

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In order to overcome the competition issues that would arise in many of the markets in which it would operate, the company (that would sell every third bottle of beer in the world) will have to strategically dispose of certain assets and brands. The sale of Peroni and Grolsch brands represent some of these strategic sales and divestments.

The Deal

In compliance with the divestment strategy agreed with the regulators AB InBrev decided to shed off some of their brands. The ones at stake are Peroni, Grolsch and Meantime whose next owner is already on the horizon. Namely, Japanese Asahi Group Holdings Ltd. The Japanese company entered in an exclusive negotiation period after offering the most favorable terms, outbidding other interested parties such as Thai Beverage and a number of private equity firms including Bain Capital and PAI Partners.

Asahi has valued the three brands at €2,550m on a cash free, debt free EV basis, which is approx. 14 times the EV/EBITDA multiple, jumping from the multiple of 11 to 12 times the EV/EBITDA previously estimated by the analysts. The deal is expected to be cash only and will be financed entirely with bank loans. The completion of the acquisition is planned for the second half of 2016, and it is further conditioned on the finalizing of AB InBev’s merger with SABMiller.

The Rationale

SABMiller/AB InBev’s rationale is straightforward. The disposal of Peroni, Grolsch and Meantime was required by regulators and is propaedeutic to their merger. Furthermore, the sale price is believed by several analyst to be a “very full” one. Indeed, the sheer amount of interest received in the latest months by a number of potential bidders, including Thai Beverage and private equity firms KKR and EQT, drove the price up to the $2.9 bn offer by Asahi.

On the other hand, Asahi’s strategy is more interesting. As the incoming President Akiyoshi Koji said last Tuesday his ambition is to become a global company.

The acquisition would be Asahi’s biggest, giving the brewer a foothold in Europe, where it currently has no presence. Asahi is Japan’s biggest brewer with a 38% market share but the company has sought growth outside Japan where beer sales have fallen over the past two decades, as the population shrinks and wine becomes increasingly popular. Indeed, Asahi has been facing a slow but constant decline in revenues from beer over the past 4 years.

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Asahi’s idea is to generate stable cash flows from their operations in Japan making it the “cornerstone of earnings”, while the acquisitions in the new markets will give them the much needed possibility to grow. Together with the brands, the Japanese brewer is planning to acquire also the manufacturing and distribution branches of Peroni, Grolsch and Meantime located in Italy, Netherlands and the United Kingdom respectively.

The acquisition will expand Asahi’s presence globally. The firm will be able to import the Grolsch and Peroni brands into Japan, Southeast Asia and Australia, benefiting from the historic brands as consumer spending has been shifting to premium products. At the same time Asahi will leverage its broader distribution network for its domestic brands, Asahi Super Dry in particular.

Asahi is expected to generate ¥90bn ($780mn) in combined revenue, boosting the overseas sales ratio to a total of 18% and marking a 4% increase. Furthermore, the financing of the deal will be facilitated by the cheap borrowing costs stemming from the low interest rates in Japan.

In addition, the Nikkei newspaper reported in December rumors according to which Asahi, which also sells spirits and non-alcoholic beverages, was considering entering the American market as well, with a ¥50bn ($436mn) bid for the U.S. soft drinks company Talking Rain.

Financial Advisors

Lazard and Deutsche Bank and the law firm Freshfields Bruckhaus Deringer are advising Anheuser-Busch InBev on the Asahi transaction. Rothschild is advising Asahi.

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