AB InBev regains Oriental Brewery for $5.8bn

The world's largest brewer agrees deal to purchase OB from KKR and Affinity Equity Partners, the largest ever sale of an Asian company by private equity firms.

Anheuser-Busch InBev has reached an agreement to reacquire South Korea’s Oriental Brewery from KKR and Affinity Equity Partners for $5.8 billion, the largest ever sale of an Asian company by private equity firms.

AB InBev sold the company in July 2009 as part of InBev’s efforts to repay debt after purchasing Anheuser-Busch the year for $52 billion.

The Belgium-headquartered firm is now using the option written into the 2009 agreement to regain the owner of South Korean beer brands Cass, OB Golden Lager and Cafri.

“OB will strengthen our position in the fast-growing Asia Pacific region,” said Carlos Brito, AB InBev’s chief executive in a statement. 

Globally, executives seem to have more confidence in the outlook for the macro economy, resulting in a flurry of mergers and acquisitions since the start of 2014. News of AB InBev’s talks in Korea follows closely behind Japanese beverage group Suntory’s acquisition of US whisky maker Beam for $16 billion.

OB will continue to be led by chief executive In-soo Chang and will remain headquartered in South Korea under its current name.

Happy hour

Since KKR and Affinity took over OB in 2009 it has grown to become the largest brewer in South Korea, driven by strong sales of Cass beer. Sales were also given a fillip by OB exclusive license to distribute select AB InBev brands in South Korea such as Budweiser, Corona and Hoegaarden.

South Korea beer volumes grew at an annual rate of about 2% between 2009 and 2012. During that same period, premium brands grew by about 10% per year. South Korea’s beer market is expected to grow by more than 13% between 2012 and 2022.

Under KKR and Affinity’s ownership Cass has become the number one beer brand in South Korea.

KKR and Affinity have helped OB grow its market share from about 41% of the Korean beer market in 2007 to about 62% as of 2013, said a person familiar with the matter. The funds have achieved this partly through new product launches and a greater focus on marketing using TV commercials featuring Korean celebrities, the person said.

So for AB InBev the easy gains in market share have already been achieved, but Korea remains a profitable and large market for beer drinkers.  

The rising price of beer

The enterprise value for the transaction is $5.8 billion, or 11.6 times OB's 2013 Ebitda. The deal's valuation is below that struck for some of the other recent beverage transactions globally such as Heineken's acquisition of a stake in Asia Pacific Breweries which was inked at 21.7 times earnings, Carlsberg's purchase of Chongqing Beer at 22.8 times and SABMiller's Foster's deal at 13.4 times. 

The average enterprise value to Ebitda ratio for M&A deals in the beverages sector was 13.1 times for 17 deals according to analysis from data provider Dealogic.

AB InBev's right of first refusal pre-empted any competition for the asset which kept a cap on the price tag said people familiar with the transaction.     

OB estimates its Ebitda in 2013 was about 529 billion won ($500 million) at current exchange rates.

As a result of an agreement entered into with KKR and Affinity in 2009, AB InBev will receive about $320 million in cash when the deal closes.

AB InBev will draw on existing liquidity to fund the acquisition. The optimal capital structure of the company remains a net debt to Ebitda ratio of about 2.0 times, with previous guidance being the achievement of a ratio below this level during the course of this year. Although this transaction does not represent a material increase in leverage, AB InBev now expects to achieve a ratio below 2.0 times after the end of 2014.

Citi advised KKR and Affinity. Deutsche Bank and Lazard advised AB InBev on the repurchase of OB, according to people familiar with the matter. 

In 2009, KKR agreed to pay $1.8 billion to buy OB from InBev, the largest ever financial sponsor M&A buyout in Korea at the time, exceeding the $1.2 billion buyout of Korea Exchange Bank by Lone Star Funds in 2003, according to Dealogic. The deal was valued at an Ebitda multiple of about eight times, said sources at the time.

The next step will be winning regulatory approval for the private equity firms’ exit from OB – never a given in Korea. However, KKR and Affinity may have an easier ride because the regulators tend to focus more on heavily regulated sectors such as banks, both sides of the transaction are foreign and AB InBev is reacquiring an asset it owned not very long ago. 

The buyers and sellers said in a statement that they expect the deal to close during the first half of 2014.

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