Beer is becoming a big deal in Asia. Chalk it up to whatever you will — the region’s burgeoning economy, globalization, and so on — but Asia’s $258 market is now growing twice as fast as the rest of the world and big brewers are starting to take notice, rightfully so. A BBC article from 2012 noted that the trend has been ongoing for the past few years, reporting that Asia is now the “biggest beer-drinking continent,” as well as the fastest growing beer market, “a sign of a young, upwardly mobile and increasingly hedonistic population,” the British news source said.
It’s no surprise, then, that the world’s biggest brewer, Anheuser Busch Inbev SA (NYSE:BUD), is deep in the midst of talks to buy South Korea’s Oriental Brewery from private equity owners KKR & Co. LP (NYSE:KKR) and Affinity Equity Partners for more than $4.5 billion, sources told Reuters. The deal could come as early as next week, and the aim is to reach a final agreement by the end of January.
Sources who spoke to Reuters caution investors that it’s still possible the entire agreement to fall through, however, and there are no guarantees. The acquisition of Oriental Brewery would be bringing things full circle for InBev, which actually sold the South Korean brewery to KKR in 2009, as part of a strategy to ease the debt burden as a result of InBev’s then recent acquisition of Anheuser-Busch in 2008. KKR then turned around and sold half of their stake in Oriental Brewery to Affinity.
The 2009 deal included a provision which gave AB InBev the right to re-purchase Oriental Brewery within five years of the transaction; that five year period expires in July, 2014. The pre-determined financial terms set in as part of the 2009 transaction allow KKR and Affinity to sell Oriental Brewery for 11 times EBITDA, Reuters’ sources added.
Oriental Brewery has seen impressive gains since it sold to KKR and Affinity; at the end of 2012 the company reported EBITDA of around $400 million. Under KKR’s ownership the company is now South Korea’s biggest brewer; the only other major brewer in the country is Hite Jinro, and together the two companies account for 90 percent of South Korea’s beer market.
“The option to buy back was struck in 2009 when the world looked a much bleaker place. And I suspect that the agreed buy-back multiple looks very attractive in today’s world,” said Trevor Sterling, an analyst at Bernstein Research. It’s likely then, that KKR and Affinity may be fairly unwilling to give the brewery up.
Currently, AB InBev has a relatively small presence in Asia; according to Reuters, the accounts for 14.3 percent of the 403 million hectoliters of beer it sold, which approximates to about 2.5 percent of the company’s 15.5 billion in EBITDA, but the rapid growth of the Asian beer market has lured many global producers to the region. Carlsberg, Heineken, and SABMiller have all jumped into the game in Asia, striking deals to help offset a lack of similar opportunities in existing markets.
But because Asia has become beer’s “new frontier,” a kind of gold rush effect has occurred, with beer-related mergers and acquisitions in Asia commanding steep prices, says Reuters. Companies are competing both with smaller, Asia-based breweries, as well as for the privilege of getting a foothold into the growing market.