Tuesday, July 24, 2012

(APB) Asia Pacific Breweries / (F&N) Fraser & Neave

Currently theres a 2 way bidding war for APB as well as a related part-owner, F&N. Its interesting to think about how this will pan out eventually. Any expressions are solely my views and not to be an advice to buy or sell. 

A chart I have done up on the situation. 

Total APB shares: 258.213774m 
Total F&N shares: 1,160.119932m

Kindest Place
Private entity related to ThaiBev, owned by son in law of owner of ThaiBev.

ThaiBev / TCC (Thailand's leading brewer and beverage company) 
- Total of 7.128% (22% * 50%) + 8.6% = 15.728% of APB
- Holds US$108m of cash

Heineken (Dutch beverage company)
- 3rd largest globally after Anheuser-Busch InBev and Carlsberg/SABMiller
- JV with F&N to create APB (Tiger beer) 80 years ago
- Total of 32.4% (via JV) + 9.49% (direct) = 41.89% of APB 

Kirin (Japanese beverage co)
- Bought 14.97% of F&N stake from Temasek for US$953M/ S$1.3B in 2010
- Total of 10.024% (indirect) of APB

Event timeline:
1) Kirin bought a passive stake in F&N from Temasek in mid 2010

2) ThaiBev offers S$2.78B/ US$2.2B for 22% of F&N (S$8.88 per share, 12% premium to S$7.96 per share) while TCC will fork up S$0.9202B for 8.6% of APB (S$45 per share, 18% premium to S$38.10 per share price on 19 Jul 2012). 

3) Both stakes are acquired from OCBC, Great Eastern and Lee Rubber Group financed with bridge loan from HSBC, SCB and SMBC. Total S$3.7B paid for 15.728% of APB

4) Heineken came in, unhappy with the current state of the JV (especially on Kirin buying F&N from Temasek) and is buying APB whole for S$50 per share (S$ 5 more than ThaiBev's bid). This works out to be S$5.1B/US$ 4.1B for F&N's stake in APB and values S$7.5B/ US$6B for the entire APB stake that Heineken does not already own

5) Citigroup and Credit Suisse are advising Heineken, while HSBC and Morgan Stanley advised ThaiBev. F&N hired Goldman Sachs 

Why the acquisition?
Tiger beer are widely distributed in various SEA markets ex. Vietnam, Cambodia, Thailand and others like Mongolia, Papua New Guinea and the Solomon Islands. After China, beer consumption is the highest in Vietnam, of 37 vs. 75 liters per capita in the UK. APB is the market leader in Indonesia, Malaysia and Singapore. Furthermore, alcohol licenses in Muslim countries are restricted and such networks are highly valued. C.25% of 2011 global beer sales of US$618B came from Asia Pacific. 

From Heineken's 2011 annuals, Vietnam was its 2nd-largest market in Asia. Asia beer volume growth was also favorable, evident from Heineken's 6.2% growth in 2011 vs. 0.2% in Western Europe. Western Europe counts for 35% of Heineken's operating profit vs. 8% for AB InBev and 1% for SABMiller (quoted by Sanford Bernstein), and Asia under 7%. Heineken bought Mexico’s Femsa in 2010 for US$8B and has the smallest emerging market presence out of the top 3. ThaiBev on the other hand has a loss making beer division while its spirits business is thriving. 

Kirin acquired Brazil’s Schincariol for US$2.57B in August 2011. It also paid US$386M for Australia's Little World Beverages in June 2012. Kirin bought out the stake it did not already own in Australia’s Lion Nathan. in 2009 for US$2.5B, Australia’s then 2nd-biggest brewer by market share after Foster’s Group.

ThaiBev might risk a credit downgrade as its net D/E will hit 3.5x upon acquisition while Heineken's will be 2.2x. 

APB LTM EBITDA is S$754M and the latest Heineken bid (@S$50 per share) values the firm at S$12.9B. APB PBT have grown 24% CAGR to S$613M in 2011. Margins expanded form 15 -22% in the decade. F&N itself derives 38% of its NPAT from the beer business with the rest in property and printing. 

The average premium in 45 beer takeovers in the last 2 years is 25%. The median takeover multiple is 13x for 9 brewery takeovers (worth over US$1B) in the last 5 years. The deal is valued at 17x EBITDA, 21x to PBT and 28x to NPAT of S$ 456.8m (including non controlling interest). This hints at some pricey valuations. At this juncture, while Heineken's bid seems strategically reasonable, the same cannot be said if ThaiBev continues bidding. At FYE 2011, ThaiBev had BHT3.5B/ US$111.2M in cash, a fraction of Heineken's 827M/ US$1.03B.

Value of the stakes (@S$50 per share)
Kirin's 10.024% stake (indirect) in APB is worth S$1.294B/ U$0.9988B, a gain of 4.8% with US$/S$ of 1.2956 (24 July 2012), excluding other portion of F&N not valued. If using F&N's market value alone, its stake is now worth S$1.396B or gain of 13%. 

ThaiBev's stake will be worth 8.6% (direct APB stake)*S$12.91B = S$1.11B + 22%*S$8.04* 1160.119932M = S$3.162B. Compared with the cost they paid of S$3.7B, seems like the market has not caught up with the partial offer. Heineken urgently want this taken over and it seems to be at almost any costs.

What could happen? (and the probability)
  1. Heneiken successfully bids for APB - (high)
  2. ThaiBev bids higher for APB - (low to mid) since they have poorer financials but seem needy of a profitable brand and network. 
  3. ThaiBev bids higher for F&N - (mid to high) expressed interest in real estate and F&B
  4. Kirin bids higher - (low to mid) low stake and needs additional 15% for a general offer
  5. Kirin with another party (likely ThaiBev) to block bids - (low to mid) as Kirin holds c.10% and ThaiBev holds c.15% of APB
  6. Third party comes in with the higher bid - remote given the high valuations 
  7. Deal falls through, no one buys anything - almost 0 probability 
1 and 3 is high likelihood. 5 is also possible but to justify blocking Heineken for the sake of ThaiBev seems far fetched and only logical if ThaiBev bids up. but that would mean an illogical purchase on ThaiBev's part in terms of valuations. On the other hand, Heineken with over 40% will serve as a more effective block against any tie ups. 

My guess is that its probably 1 only happening. Kirin might actually consider bidding (i.e 4 is likely as well). They have a EBIT cover of 6x and D/E of 1.34x vs. Heineken's 4x and 1.95x. Further, Kirin has also seen a decline in revenues in the past year with operating margins of over 6% while peers are 12-18%. It might make sense for them to gear up and secure Asia Pacific. In order of probabilities from highest to lowest, its 1, 3, 4 and 5. F&N board has till 27 July to consider Heineken's proposal. 


-2 August 2012 (Update)

Coca Cola was quoted to explore bid for F&N beverage business, reportedly worth some S$3 bn.

- 6 August 2012 (Update)

F&N board accepted Heineken's offer and pending to table the offer to the rest of the shareholders. Various sources suggest a possibility of Thaibev and Kirin to go against the offer. Given their initial interest to purchase F&N for the breweries + beverage business, the probability of rejecting Heineken's offer is high, contrary to what the price is showing now.

APB went gradually from S$34.69 (16 Jul) to a high of S$52 (25 Jul). It has hovered around the S$50 price levels to currently S$48.85. F&N gapped up from S$6.82  (27 Jun) to S$8.40 (27 Jul). Currently it is at S$8.20. There is a small likelihood that recent F&N investors may face a loss in event the deal falls through. 

- 7 August 20212 (Update)

ThaiBev offers S$55 per share for APB shares held by F&N (7.3%). This is higher than Heineken's previous bid of S$50 per share. While Reuters quoted a ThaiBev spokesperson to not wish for Heineken to exit the JV, it seems like a plan to buttress their share purchase with backstop from Heineken. A point to note is that a good amount (c.30%) of APB's volumes are for Heineken and pulling out its license will result in a much weaker APB. Kirin was also quoted to mention they are more interested in F&N Berhad, the Malaysian entity to APB.

Vichate Tantiwanich from ThaiBev mentioned the firm is looking to increase stake in F&N as they currently do not have board seat and influence. Real estate seems to be a pull factor. Board control is necessary not only for a profitable business but also to have access to returns from trading the listed assets.  Notably Heineken and Carlsberg offered 23x EBITDA in a 9.5B pound tskeover of Scottish & Newcastle in 2008. 

Current ownership tally. 

-14 Aug 2012 (Update)

Thai Bev raised its F&N stake to 26.2%. Looks like the original idea was right. But it does seem they are overpaying greatly. F&N is likely to be trying to achieve control since entire buyout would force ThaiBev to overgear. Credit ratings will be down at least 2 notches.

- 27 Aug 2012 (Update)
F&N approved Heineken's US$6.35B offer for shares held by F&N and APB's minority shareholders, F&N's board also agreed not to engage in talks or accept other offers for its interests in APB. Heineken also attached a S$55.9M break fee on its offer and set a 15 Dec deadline (120 days). Heineken announced an offer of S$53 per share (S$5.4b/S$4.3B) for APB and additional S$0.163 for non-APB assets held by APIPL. Includes public market purchases.

F&N states that it will return S$4B (US$3.3B) to shareholders through capital reduction. F&N will cancel 1 share for every 3 shares held, with a cash distribution of S$8.50 for each share cancelled. The price is based on VWAP for shares from 16 to 24 Aug. This means for every 1000 shares (1 lot), one will receive S$2,805 in cash and 330 shares cancelled, and still own the same proportion of the company. As of 14 Aug, ThaiBev holds 26.4% of F&N and stand to receive cash distribution of S$1.056B. Kirin with 15% in F&N will get some S$600M. 

F&N is down 3.7% from its 52-week high of S$8.59, reached in the days before Heineken raised its offer for APB to S$5.4B or S$53 per share last week. Heineken's direct and deemed interest in APB has gone up to 84.24%. This includes the 2.68% stake Heineken bought on Tuesday for S$367M or S$53 a share. Temasek Holdings was said to be among the sellers (1.4%) in a married deal on 21 Aug 2012 at S$53 per share of APB.

Heineken said it would fund the deal with available cash of about €2B ($2.46B), its unused revolving credit facility of another €2B and a new bridge loan arranged by its financial advisers, Credit Suisse and Citi. 

- 10 Sept 2012 (Update) 

News state Thai Bev is seeking S$9B ($7.3B) share backed loan for possible F&N takeover. ThaiBev has already bought 29% of F&N for S$3.6B, funded partly by a S$2.8B loan, but does not have a seat on the F&N board. If ThaiBev's holding hits 30%, it would be obliged to bid for all of F&N.

- 13 Sept 2012 (Update) 

ThaiBev and TCC collectively owns 30.36% and offers to buy out entire F&N at S$ 8.88 per share, a US$7.2B cash offer. The consortium are advised by Morgan Stanley, DBS and UOB, offer is 2 weeks before shareholder vote on Heineken's offer for APB. The group mentioned they will not incur additional debt for the purchase. 

- 25 Sept 2012 (Update) 

Heineken completed purchase of 8.6% stake held by Kindest Place. ThaiBev and TCC also mentioned agree to vote for sale of F&N's stake in APB to Heineken.

- 28 Sept 2012 (Update) 

F&N's capital reduction plans fell through with 54.3% voted for, well below the 75% needed due to the Thai consortium voting against it. The other 94% of the F&N holders voted for the capital reduction. APB's S$7.9B/ US$ 6.4B sale to Heineken was formalised. Kirin is also expected to sell its 15% stake in F&N to the ThaiBev/TCC consortium. 

- 10 Oct 2012 (Update) 

F&N board stated ThaiBev's S$8.88 per share offer is not compelling but fair based on sum of parts valuation of S$8.3-11.22 per share. F&N directors intend not to tender unless acceptances reach 50% and offer becomes unconditional. ThaiBev and TCC collectively owns 33.5% of F&N. F&N on the other hand also rejected a US$1.14B offer for its hospitality business by Overseas Union Enterprise. ThaiBev closed up 5.1% and F&N up 0.6% to $8.93. The offer for F&N ends 29 Oct.

Sources: Wall Street Journal, Financial Times, Straits Times, Business Times and various public news sources.