Less than a month into 2014, big beverage companies have already spent almost three times as much buying competitors as they did all last year. As companies hone their focus on Asia, analysts see more in the pipeline.
Coming on the heels of the slowest year for alcoholic beverages deals in almost two decades, beermaker Anheuser-Busch InBev NV (ABI) announced it would spend $5.8 billion to buy back Korea’s Oriental Brewery. That follows last week’s $16 billion purchase by Suntory Holdings Ltd. of distiller Beam Inc.
“It’s a sector where M&A makes sense,” said Jonathan Fyfe, an analyst at Mirabaud in London. “There are probably more options to do things this year than in 2013 thanks to the fact these companies are deleveraging fast.”
As Japanese companies like Suntory seek growth abroad to combat an aging population at home, European drinks companies are targeting Asia as they seek to lock down control in a region where both the beer and spirits markets are still expanding. That could bring the biggest brewers’ share of beer sales in Asia up toward the level of developed markets.
While the top 10 brewers in the world now control about 65 percent of beer volumes, almost twice the level they did in 1998 after two decades of consolidation, that dominance is skewed toward developed markets, according to Nomura analysts. In Asia, the top four companies have just 43 percent of the beer market compared with 88 percent in North America, they estimate.
The industry is still “relatively unconsolidated,” with the top four or five brewers in the world being joined by at least 40 others, according to Philip Morrisey, an analyst at Berenberg Bank in London.
“In beer and in spirits, the major companies are cash generative and in a cycle of deleveraging,” Morrisey said. “While the market consolidated significantly in the past few years, there are lots of opportunities to come.”
Suntory became the world’s third-largest liquor maker after last week’s agreement to acquire Beam bourbon, gaining brands including Maker’s Mark and Sauza tequila. The Japanese company offered to buy India’s United Spirits Ltd. whiskey asset Whyte & Mackay from Diageo (DGE) Plc., CNBC reported yesterday. Suntory spokeswoman Naoko Tsuda declined to comment on the report.
Suntory’s soft drinks unit also bought the Lucozade and Ribena brands from GlaxoSmithKline Plc last year for 1.35 billion pounds ($2.2 billion).
Japan’s population is shrinking and aging, compelling Suntory to look beyond its home market, where it sells drinks from canned coffee to beer. While demand for alcohol in Japan is dropping, worldwide sales of whiskey and other spirits are projected to climb an average of 4.9 percent each year through 2017, data compiled by Bloomberg show.
Suntory’s purchase of Beam, one of the last big independent non-family-owned liquor assets, sparked speculation that companies like Diageo and Pernod Ricard SA (RI) could next turn their attention to family companies like Brown-Forman Corp., the maker of Jack Daniels whiskey. Diageo failed to buy the Jose Cuervo brand from Mexico’s Beckmann family, its owners, saying in December 2012 that they were unable to agree on the price.
The Beam acquisition “signals there are things to be done and it makes the bigger companies like Diageo and Pernod feel they’re going to need to get cracking,” said Ian Shackleton, an analyst at Nomura in London. “In spirits, most of the questions are about when families sell out and in my experience that takes a long time.”
Pernod or Diageo may yet counterbid for Beam, or Suntory could sell some Beam brands, said Spiros Malandrakis, an analyst at Euromonitor. That may spur a “domino effect” whereby smaller assets change hands among different companies, he said.
Euromonitor estimates that the volume of beer sold in the Asia-Pacific region will grow an annual pace of 4.9 percent in the five years through 2017, with spirits volume expanding at a pace of 5.4 percent. That compares with declines anticipated in western Europe and a stagnating North American beer market.
“For Western companies, Asia has become the place for geographic growth, whereas for Asian companies, the western world offers tremendous know-how opportunities,” said Yoko Takagi, a partner at law firm White & Case in Madrid.
AB InBev’s takeover of Oriental Brewery stems from its previous sale of the asset to KKR & Co. in 2009 to pay down debt after the $52 billion takeover by InBev NV of Anheuser-Busch Cos. It agreed to an option to buy back the maker of Cass beer five years later at pre-agreed terms of 11 times earnings before interest, taxation, depreciation and amortization, according to people familiar with the 2009 transaction.
“Big beverage companies have enough cash to undertake acquisitions after years of austerity and investment cutbacks,” said Enrique Quemada, chief executive officer of OnetoOne Corporate Finance, a Madrid-based investment bank specializing in mergers & acquisitions. “We are poised to see more deals in the drinks industry this year, especially in Asia and the U.S.”
While the price paid by AB InBev for Oriental Brewery was seen as “reasonable” by Trevor Stirling, an analyst at Sanford C. Bernstein in London, Suntory’s estimated 20.5 times Ebitda bid for Beam was at the higher end of recent prices, he said.
Price may still act as a constraint on deal activity should sellers demand high valuations, according to Daniel Lacalle, a senior fund manager at Ecofin Ltd. in London.
“I don’t think this will be a year of big growth in M&A activity as valuations aren’t very attractive yet,” he said.
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