Interbrew goes for Lion's share

Interbrew doubles its beer production capacity in China by buying a Malaysian tycoon''s China brewing assets.

Belgian beer multinational Interbrew has long prioritised China as a critical beer market and in the past year has expanded rapidly via acquisitions in key provinces (see related articles).

Late Friday night it made its boldest acquisition to date, in a move that sees Interbrew almost double its brewing capacity from 12 million hectalitres to 22.6 million hectalitres. The acquisition catapults Interbrew to joint-third in China (by volume) with Yanjing.

Interbrew is buying the profitable beer assets of Lion Diviersified Holdings, a Malaysian conglomerate 50% owned by William Cheng. The deal will initially be structured as a JV, with the Belgian company paying $131.5 million for 50%. However, after one year it can call the remaining 50% for a further $131.5 million. This puts the total purchase price at $263 million.

Lion's China assets, added to Interbrew's existing breweries, will make the combined entity number one in Guangdong province and Zhejiang province. It will enter the top three in Jiangsu and will enter three new provinces: Hubei, Hunan and Shandong.

Lion's Cheng had built his brewing empire through the 90s and showed himself to be a canny investor. He is thought to have spent about $79 million on the breweries which he is selling out of at a price that is over three times that. However, Cheng has been trying to dispose the assets for quite a while, and first spoke to Interbrew back in 1997.

Lion is Malaysia's foremost steelmaker, but got into trouble during the Asian financial crisis. Cheng had previously diversified into cars, property and retail and turned the steelmaker into a true conglomerate. Unfortunately, the leverage this involved was crippling after 1997. The company is saddled with $2.3 billion of debt, and even though Cheng owns 50% of the company it pays him a miniscule dividend.

The sale of the brewing assets can be seen as part of the debt reduction exercise. His brewing assets last year made a $5 million profit, and carry a book value of $186 million. The price Interbrew paid represents 1.4 times book value.

Other bidders included San Miguel, Asia Pacific Breweries and SABMiller/ CRE.

So what caused Interbrew to act now after six years of talks with Cheng? It seems that the activities of a key foreign competitor acted in part as a catalyst. In July SABMiller bought a 30% stake in the highly successful Harbin Brewery from a Hong Kong private equity firm. It paid $100 million for the stake.

The acquisition took the SABMiller and China Resources JV to the top of China's beer rankings, supplanting China's most well known beer brand, Tsingdao. Trailing SAB-Miller badly, Interbrew was forced to act. This acquisition now puts it firmly back in the game.

ING advised Interbrew, while Lion did not have an adviser.