Oriental Brewery may produce a happy hour for its private equity investors.
Anheuser-Busch InBev has started discussions over buying back the South Korean brewer, which it sold to Kohlberg Kravis Roberts in 2009 for $1.8 billion. A back-of-the-beer mat calculation suggests that would earn O.B.’s private equity backers a 34 percent annualized return.
K.K.R. originally bought the maker of Cass and OB Golden Lager with $750 million of its own equity. It drove a hard bargain. AB Inbev had to help finance the deal with a $300 million payment-in-kind loan - a type of borrowing whose interest payments compound over time - at an attractive interest rate of 8 percent. It also gave AB InBev a right to buy Oriental Brewery back from July 2014 for a multiple of 11 times the previous year’s earnings before interest, taxes, depreciation and amortization, or Ebitda, a person close to the situation told Reuters Breakingviews when the deal was first struck.
Its private equity owners have turned the company into South Korea’s leading brewer, lifting its share of volume and sales to over 50 percent of the market by rebranding products to appeal to younger customers and introducing new flavors. The brewer’s Ebitda grew from $200 million in 2008 to around $330 million at the start of 2013, sources told Reuters. If that growth rate has continued since then, Oriental Brewery will have Ebitda of $374 million by the start of 2014.
That suggests a payment from AB InBev of $4.1 billion. Deduct the value of the payment-in-kind note, worth $441 million by mid-2014, and assume the private equity groups have paid down around half of the remaining buyout debt, and the remaining equity would be worth $3.3 billion. That’s a 34 percent annualized return on the original investment.
AB InBev may not exercise its right to buy the business back. But even then, South Korea’s capital markets may allow K.K.R. to get a similar price in an initial public offering. Oriental Brewry has an operating profit margin twice as large as its nearest rival, Hite Brewery, according to Bernstein research. The latter’s parent, Hite Jinro, also trades on 11 times its trailing Ebitda. Either way, the private equity owners of Oriental Brewery should be able to call the investment a success.
Una Galani is the Asia corporate finance columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
