Heineken Lack of Asia Options Seen Forcing Bump: Real M&A

Heineken Lack of Asia Options Seen Forcing Higher Bid
Heineken last week offered S$7.5 billion ($6 billion) to buy out the other investors in APB, the brewer and distributor of Heineken and Tiger brands in markets from Indonesia to China. Photographer: Tomohiro Ohsumi/Bloomberg

Heineken NV may need to raise a $6 billion offer for the rest of Asia Pacific Breweries Ltd., its main distributor in the region, to win over the Dutch company’s local venture partners.

“It’s in Heineken’s interest to pay,” Richard O’Donovan, a Dublin-based analyst at Davy Research, said in a telephone interview. “They could go a little bit higher. There are very few assets that Heineken can go after, and this is one where they’ve had a long relationship which has been quite successful. They’ve left themselves with nothing of significance in Asia unless they follow through with this deal.”

Heineken last week offered S$7.5 billion ($6 billion) to buy out the other investors in APB, the brewer and distributor of Heineken and Tiger brands in markets from Indonesia to China and Heineken’s main foothold in the world’s biggest beer market for more than 80 years. APB shares closed yesterday 4 percent higher than the bid, indicating some traders anticipate a sweetened proposal, according to data compiled by Bloomberg.

Two days before the bid, one of Heineken’s competitors agreed to buy a stake in Fraser & Neave Ltd., which is APB’s other major owner. Concern that F&N’s new investor, Thai Beverage Pcl, along with shareholder Kirin Holdings Co. will assert more influence over APB spurred Heineken’s takeover offer, Deutsche Bank AG said. While data compiled by Bloomberg show the bid is already the most expensive relative to earnings of any Asian brewery takeover greater than $1 billion, UBS AG says Heineken may need to boost the price as much as 30 percent to persuade ThaiBev and Kirin to part with APB.

Kirin Bid

Kirin, Japan’s largest brewer by market value, is considering a bid for F&N’s soft drinks and dairy businesses, said three people with knowledge of the matter. The people, who asked not to be identified as the deliberations are private, didn’t say how much Kirin would offer for the operations.

Kirin spokesman Kan Yamamoto declined to comment on the company’s plans, or the prospect of a higher bid for APB.

The board of directors of Singapore-based F&N is expected to meet today to discuss the bid from Heineken, said two people with knowledge of the matter. The board may not make a decision on the offer at today’s meeting, one of the people said.

Representatives for F&N and Bangkok-based ThaiBev declined to comment on the prospect of a higher bid.

“We feel our current offer is a full price and represents compelling value,” said Charlie Armitstead, a spokesman for Amsterdam-based Heineken.

‘Valuable Asset’

Founded in 1931, APB has over 40 beer brands including Tiger which is offered in 60 markets worldwide, according to the company’s website. APB’s profit rose almost 19 percent to S$217.6 million in the six months through March with sales mostly from South and Southeast Asia, according to data compiled by Bloomberg.

APB is majority owned by a joint venture between Heineken and F&N. Heineken owns a 42 percent stake in APB, and F&N controls about 40 percent.

“This is a very valuable asset,” said Jenai Chua, a Singapore-based analyst at Bank Julius Baer, which manages $281 billion in assets. “Tiger beer has a strong presence in Malaysia and Singapore and it’s expanding into other parts of Southeast Asia.”

Beer sales in Asia, the world’s largest beer market, will grow at an annual rate of 4.8 percent in the five years to 2016, the second-fastest pace of growth in the world after the Middle East and Africa, according to projections from researcher Euromonitor International.

Most Expensive

APB’s Bintang beer is the number one seller in Indonesia, with 42 percent of the market by volume, according to Euromonitor. Tiger is Singapore’s top beer brand with almost 35 percent, and Heineken is fourth in Vietnam, Asia’s fastest-growing beer market by volume.

Heineken says its namesake brand is APB’s largest, representing about 30 percent of its volume.

Heineken’s offer of S$50 a share for the 58 percent of APB it doesn’t already own values the company at about 17 times earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. That’s the most paid in a takeover of an Asian brewer worth more than $1 billion, and the highest price globally since Heineken and Carlsberg A/S offered 23 times Ebitda in a 9.5 billion-pound ($15 billion) takeover of Scottish & Newcastle Ltd. in 2008, the data show.

Thai Billionaire

The bid came two days after ThaiBev, controlled by Thai billionaire Charoen Sirivadhanabhakdi, said it would pay S$2.78 billion for 22 percent of F&N, while his son-in-law’s company would buy 8.6 percent of APB for S$45 a share. F&N said today that ThaiBev increased its stake to 23.9 percent. With the purchase, ThaiBev tops Kirin’s 15 percent stake to become F&N’s largest shareholder, data compiled by Bloomberg show.

“Concerns over the prospect of having two competing brewers having significant influence in F&N is likely to have prompted Heineken to attempt to address the situation once and for all,” Gregory Lui, an analyst in Singapore with Deutsche Bank, wrote in a July 23 note. “Heineken raising its offer cannot be ruled out given Heineken’s balance sheet capacity.”

Heineken, the world’s third-largest brewer, needs F&N’s board to recommend the deal to its shareholders and for those investors to vote in favor of the transaction, the company said in a July 20 statement. Failing that, Heineken said it “will review all options available to protect its commercial interests.”

Debt Covenant

“It’s probably not their best offer they put on the table in the first place,” Olivier Nicolai, a London-based analyst at UBS, said in a phone interview. “If Heineken wants control, they will have to raise it for sure.”

By raising the offer as high as S$65 a share, or 25 percent more than yesterday’s closing price, Heineken would still keep its net debt at less than four times Ebitda, a threshold regarded as “the covenant in the beer industry,” according to Nicolai. Heineken had 813 million euros ($988 million) in cash as of December and net debt at 2.53 times Ebitda, the data show.

Yesterday, APB shares, which had earlier traded within 50 cents of Heineken’s S$50 offer, surpassed that level in the final eight minutes of trading. The surge, which left APB at S$52, reflects speculation that a higher bid may be possible, Andrew Holland, an analyst at Societe Generale, said in a phone interview from London.

‘Powerful Position’

“Fraser & Neave is in quite a powerful position,” he said. “They don’t have to sell. They can go to Heineken and say, ‘We’re interested in principle in your offer, but you need to offer more money.”

APB dropped 3.9 percent to S$50 a share in Singapore today. F&N rose 0.4 percent to S$8.38, a new record.

Heineken, which also owns a stake in India’s United Breweries Ltd., said Asia accounted for 6.5 percent of operating income last year. It describes APB as “underpinning our position in the region.”

At F&N, beer generated income of S$172 million in the year through last September, 41 percent more than the year before and the third-largest source of profits after development and investment property, according to data compiled by Bloomberg.

The beverage business is the primary appeal to F&N investors, said Neo Chiu Yen, an analyst at ABN Amro Private Banking, which manages $207 billion in assets. The beer unit generates cash flow that helps F&N expand its smaller soft-drink business, she said.

“What everyone is most interested in is the brewery business,” Mikihiko Yamato, deputy head of research for JI Asia in Tokyo, said in a telephone interview. “Breweries are a highly attractive business because the margin is high.”

Real Estate

Without the beer business, F&N would depend predominantly on shopping centers, serviced apartments, homes and industrial property. In Singapore alone, Frasers Centrepoint, an F&N subsidiary, oversees nine malls, while the company has development projects in the U.K., Australia, New Zealand, Thailand, Vietnam and China, according to the Frasers Centrepoint website.

In the year ended September 2011, property accounted for more than two-thirds of F&N’s profit, according to data compiled by Bloomberg. Excluding breweries, food and beverage units made up 8.2 percent of net income, the data show.

“If you sell APB, F&N will essentially be a property business in Singapore, which means that if you’re a brewer, like ThaiBev and Kirin, can you justify to your shareholders owning this kind of business?” said Nicolai at UBS.

F&N Breakup

In the event of an APB sale, Kirin and ThaiBev may push F&N to separate its property business from the remaining food and drinks assets, Jit Soon Lim, a Singapore-based analyst at Nomura Holdings Inc., said in a July 23 note. Such a move would allow investors to value the units more accurately, according to Maybank Kim Eng Securities.

“They should carve out the property business later because these diversified units are not even related,” said Maria Lapiz, co-head of research at Maybank Kim Eng in Bangkok. “They’re probably worth a lot more individually, and it’s one way for ThaiBev to recoup its investment.”

Lapiz, who covered ThaiBev at JPMorgan Chase & Co. until February, said the disposal of APB may lead Kirin to sell its stake in F&N, while ThaiBev focuses on the soft-drink business, which it is eager to grow.

Still, for that to happen, Heineken first needs to succeed in its bid for APB.

“In Asia-Pac at this stage, this is Heineken’s business,” said O’Donovan of Davy Research. “They’ve had it for a long time, so they’re not going to be willing to give it up lightly.”

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