How Fujian Sedrin was won

You were acting for InBev on the Fujian Sedrin acquisition. Were the negotiations arduous? From the period when InBev was informed they were the preferred bidder we had a 45 day exclusivity period to complete a deal. That period would have expired on 28 January. Even with the Christmas and New Year holidays we came in ahead of schedule. I guess the fact that we reached agreement ahead of deadline shows that negotiations went well. Usually when things are difficult they go right to the wire. On this deal I felt that the parties were open in presenting their respective viewpoints and always looking for a common ground. Naturally there were a few late nights but negotiations were always pleasant. InBev has spent $730 million on a highly profitable company. How did this come about? It was on many peopleÆs radar screens ûit is the eighth biggest brewer in China and very profitable. It is a very desirable asset and I think many other foreign brewers will be extremely disappointed they didnÆt get the asset. In fact, itÆs one of the last really good brewing assets in China û if not the last. Is it the most profitable brewery InBev has bought in China? The company has consistently had EBITDA margins of over 30%. I guess that would definitely make it at least one of the most profitable. Why is the company so profitable? By the standards of Chinese breweries itÆs quite large, thereby benefiting to an extent from economies of scale. More importantly, management have been very effective at driving down costs. The company produced 8.4 million hectoliters of beer last year compared to a capacity of 9 million hectoliters. By any standards, thatÆs a high capacity utilization rate which has also helped the company keep down costs. It also has very strong distributor relationships which support a strong route to market model and a great brand. At 13xEV/Ebitda is this also the most expensive acquisitions for InBev in China? Actually it is broadly in line with InBevÆs most recent acquisition which have been in low double figure Ebitda multiples. But then you also have to factor in that prices have been rising recently. Our view is that InBev paid a fair price and most importantly that the acquisition meets all its internal financial targets. Also if you are comparing it to recent transactions, it is significantly cheaper than the multiple Anheuser-Busch paid for Harbin. Who were the foreign and Chinese bidders involved on the deal and why did you win? Were you the highest bidder? The bid involved a financial figure but InBev was also required to submit future plans for the businessû essentially a description of their strategy for the business. I guess we met the local governmentÆs expectations on both levels. The bidding process was very orderly and fair to all bidders. IÆd rather not comment on whether there were any Chinese bidders or whether our bid was the highest û you would really have to ask the sellers that question. Why is the Putian government selling off such a profitable asset? I believe itÆs part of an overall government strategy in China to get out of business altogether in an orderly way and to focus on doing what the State should be doing - providing schools, hospitals and so forth . What were the companyÆs net earnings for the past few years? We prefer not to disclose that figure. The industry has been plagued by a lack of profitability in China. How do you plan to reverse that trend? InBev will work with existing management to improve the production processes further and to cut procurement costs. InBev will introduce its own best practices wherever possible. Questions: At what price do you sell the beer to the wholesalers? I t appears nit prices are pretty low. A take-away restaurant in Nanchang, Jiangxi province, might sell a bottle of Sedrin at Rmb 6 for example. It costs about half of that in a Chinese supermarket. Answer: That figure is not publicly available. What will the contribution of revenues of Sedrin be to InBevÆs overall China revenues? A rough calculation would be somewhere over 25%, based on SedrinÆs volume sales (8.4 million hectoliters) to total InBev sales (35 million hectoliters), and taking into account that Sedrin has higher earnings than the average across the rest of the portfolio. What return on equity are you expecting from the acquisition? InBev prefers to use return on invested capital. InBev expects ROIC to exceed the weighted average cost of capital for acquisitions within five years. In the case of Sedrin, we expect it to occur in four years, so it is within target. WhatÆs the companyÆs gearing? Sedrin has less than US$10million of net debt û so the gearing figure is negligible What role will Fujian SedrinÆs beer brands play in the companyÆs expansion nationally? Amongst all the local beer brands in China, we believe that the Sedrin brand has the most potential for success at a regional level. The strength of the brand is a function of quality, marketing and a mix of other factors. Sedrin has a very strong brand. They have already demonstrated they can be successful outside of their home province of Fujian through their expansion into Jiangxi. Is there a concern that since InBev has joint ventures and minority stakes in other breweries in China, the Chinese partner in those areas might block the expansion of a beer from another part of China? This is a theoretical concern. But InBev will cross that bridge when they come to it. Consumers in China tend to be very price sensitive. Branding is important to convince consumers to pay more for their drink. WhatÆs the situation regarding Sedrin? ItÆs rather good from that point of view. For example according to the latest estimates in 2005 only, 1% of sales came from the value (inexpensive) segment. 99% of SedrinÆs sales came from the premium and core (high and mid-level) beers. Do you believe that Harbin Brewery has been able to expand nationally? That was one of the rationales for Anheuser-Busch buying the brand. They have had some success in expanding nationally. But the beer has Harbin on the bottle, so itÆs still appears to be positioning itself as a local brand and its main appeal is still in Northern China. How does Sedrin position itself as a brand? The brand name is associated with ôpure as snowö and in terms of target market it is identified with social occasions comprised of young, single people with above-average disposable income. How did InBev evaluate the company before they decided to acquire it? From a purely financial perspective we carried out a standard discounted cash flow analysis to see what contribution the company would bring to InBevÆs China operations. Naturally we examined other factors such as management quality, brand strength, footprint, product mix, distribution arrangements and quality of earnings. InBev liked what they saw and made a bid. You talk a lot about provincial distribution, but the biggest cities such as Chongqing, Tianjin, Beijing and Shanghai do not belong to any province. They have the same status as provinces, however. WhatÆs InBevÆs policy towards these cities, which have the highest income levels in China? InBev actually covers some of the biggest cities in China, including Fuzhou, Guangzhou and Shenzhen, which also happen to be among the richest in China. As far as provinces are concerned, InBev is now number one in volume terms in Guangdong, Fujian, Zhejiang, Hunan and Hubei, and second in Jiangsu. So InBevÆs existing positions are very strong û and also, very importantly, in contiguous markets û not scattered as some other brewers' are. Of course everyone would always like to have a very strong presence in markets such as Shanghai, but in reality that market is extremely competitive and margins are relatively thin.

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