Hong Kong, March. 10, 2009 - The sale of Anheuser-Busch InBev's South Korean beer business appears to be losing its fizz, as buyers baulk at the $2 billion price tag and its owners signal they're in no rush to sell.
AB InBev's auction of Oriental Brewery (OB), which first hit the headlines last September, had been expected to attract a host of bidders, eager to tap around 40 percent of a big Asian beer market.
But ever since AB Inbev launched the deal a few months ago, several hurdles have appeared, including South Korea's deteriorating economy and weakening currency.
Adding further doubts to the process is the uncertainty of Lotte Group's interest. It was viewed as a leading bidder but sources say it's unclear whether Lotte is still in the running.
The sources declined to be identified because they were not authorized to speak on the record.
Another key development was the success of AB InBev's $5 billion bond offering in January. Those proceeds took pressure off the company from having to quickly sell off assets to pay a $7 billion loan due in November.
AB InBev, the world's largest brewer, is proceeding with the OB auction despite the cushion from the debt sale, sources say.
Still, another sticking point on OB is determining what it's worth. While the company has a strong business, some analysts believe its valuation is below the $2 billion mark.
"InBev seems to be looking for a $2 billion bid, but that translates to about 3 trillion won, which sounds like an excessive price," said Jin Yoo, of Goodmorning Shinhan Securities, adding that 2.5 trillion won was more plausible.
Yoo pointed out that the market cap of No.1 brewer Hite was 1.16 trillion won. South Korea's beer market is a duopoly, with Hite controlling around 60 percent market share.
InBev declined to comment for this article.
Domestic retail giant Lotte Group was viewed by analysts and bankers as a top choice, to not only buy the business, but to pay a good price. Beer would complete Lotte's product line-up, which includes whiskey, and the popular local liquor, soju. That view is cloudy now.
Sources familiar with the matter say it's unclear whether Lotte is even present for the next round of bidding. While anything is possible during the course of an auction -- including the dropping out and return of suitors -- losing a cashed-up, local bidder is probably something AB InBev would rather avoid.
Lotte declined to comment.
London-listed SABMiller the world's second largest brewer after AB InBev, is interested in OB, according to a source familiar with the matter. But the company's valuation of the business is around half of what AB InBev was hoping to get, said the source.
It's unclear where SABMiller stands in the process at the moment. The company declined to comment.
Japan brewers Kirin Holdings and Asahi Breweries Ltd have been mentioned in local and Japanese media as interested in OB. Asahi and Lotte have teamed up previously for acquisition bids, and the two established Lotte Asahi Liquor Co. in 2004.
But a source said that Asahi would only pursue OB if Asahi linked-up with Lotte in a joint bid.
Private equity firms Affinity Equity Partners, MBK Partners and Kohlberg Kravis Roberts & Co have also shown interest in the auction, though getting financing in this market would be tough.
NOT A FIRE SALE
During last week's earnings announcement, AB InBev said it is still committed to divesting $7 billion of non-core assets, saying it could be reached with two to three sales from a list of five to six businesses.
The $7 billion loan due in November is part of the $45 billion in borrowings Belgium-based InBev took out last year to buy U.S. brewer Anheuser-Busch for $52 billion.
Cash generation alone might fully cover the remaining $3 billion of the $7 billion loan, the company said, with its CFO adding that the divestitures are not "a fire sale."
That statement may have thrown cold water on the premise that the company was moving quickly to sell OB. It also aimed to underscore AB InBev's message that it won't sell OB for less than what it thinks its Korean business worth.
"The debt refinancing really means that they are not under pressure to sell assets now," said Trevor Stirling of Sanford Bernstein.
Stirling's estimated figures for asset sales are $2.2 billion for OB, $2.6 billion for AB InBev's theme parks, $1.7 billion for its packaging business, and $2 billion for its German beer assets, though those figures are based more on what the company believes the assets are worth, rather than what a buyer would likely pay for them.
Ji Ki-chang, an analyst at Tong Yang Securities in Seoul, estimates an OB valuation of $1.3 billion to $1.5 billion. He said that represents around 13 times OB's 2006-2007 earnings before income, taxes, depreciation and amortization -- a cash flow measure known as EBITDA. The multiple of 13 came from similar valuations of beverage company acquisitions, he said.
A sharp decline in the won currency is another key factor to consider. The won is down 36 percent against the dollar in the past year, denting the dollar earnings of companies in Korea. That alone could play a key role in whether the OB auction ends with a pop or fizzles out.
($1=1510.5 Won)