Glenboden M & A Originations

Will Heineken or Kirin win race to strong no.2 in Brazil brewing ?

Priority Rating priority rating 4
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Origination Status press reports, since February 2012
Asset Petropolis Group (Brazil), no.3 domestic brewer
Buyer candidates include Kirin, Heineken
Seller private shareholders of Petropolis
Buyer Rationale to achieve strong no.2 market position in Brazil
Seller Rationale attractive valuation and deal structure
NBs Kirin Holdings acquired Brazil's no.2 brewer, Schincariol, in 2011
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Following the trajectory in other major markets, Brazil looks ripe for a beer consolidation, to create a stronger no.2 behind AmBev. It's an open question however as to whether Heineken or Kirin will win the race; the key could be in deal structuring and valuation.

Major market consolidation story ...Brazil is the fourth largest global beer market. With a 2010 growth rate of some 10%, annual per capita consumption at a still modest 54 litres, and favourable demographics, it's also one of the most attractive.

Petropolis is the last major player to remain independent (see chart). M&A history would suggest however that either Heineken, or Kirin of Japan will take them out within a few years, in order to become the clear no.2 player in Brazil.

In the first half of 2012, both of these international groups have been rumoured to be preparing a bid for Petropolis, a privately-held group about whom little financial information is available.

... two global players lined up ...Through acquiring FEMSA of Mexico in 2010, Heineken made a step -change in its market position in the Americas, becoming no.2 in Mexico behind Grupo Modelo, and a significant player in Brazil.

Kirin achieved a similar feat in 2011, when it acquired a majority stake in Schincariol, from its founding family, in what turned into an acrimonious stand-off with the target's minority shareholders.

It's unclear which of the two groups will eventually win over Petropolis; if there's any clue in deal structuring however, then Heineken might have the upper hand.

... Heineken's deal to lose ?Kirin's purchase of Schincariol was both troubled and fully -priced. According to Kirin itself, on the basis of normalised LTM03/2011 EBITDA the enterprise valuation came to x15,7 EBITDA, or nearly x3 net sales revenue (see valuation).

By contrast Heineken acquired FEMSA in an all-share deal, through which it surrendered about 20% of its diluted equity, but at the relatively low valuation of x10,9 EBITDA (Glenboden's estimate).

That valuation can only reflect the fact that the economic value of Heineken's shares was worth more to the owners of FEMSA than the equivalent in cash. Perhaps Heineken can replicate such a deal structure with Petropolis ?

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THIS LEAD'S VALUATION
Size (€ mln) 3.500
Sector beer
Asset Quality Brazil no.3 branded
Seller private corporate
Buyer large plc
P/S 3,0
P/Ebitda n/a
Type enterprise value estimate
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