CR Snow/SABMiller buys Kingway Brewery
Gaining market shares seems to be brewers' top priority. Or how should we interpret SABMiller's recent acquisition of the loss-making brewer Kingway otherwise?
SABMiller said on 5 February 2013 it agreed to buy China’s Kingway Brewery Holdings for 5.38 billion yuan (USD 863 million) through its Chinese joint venture with China Resources Enterprise, CR Snow, thus beating competition from AB-InBev and Beijing Yanjing Brewery. The transaction price includes about USD 33 million worth of loans, it was reported.
China's major brewers have been circling Kingway for over a year after Heineken and its partner APB decided to sell their 22 percent stake in Kingway in May 2011. At the time of Heineken's exit Kingway was valued at USD 730 million, but Heineken still wanted out in order to focus on the more profitable premium segment. On average, brewers in China earn about USD 2 per hl, while earnings in the premium segment are probably 10 times this sum.
"Kingway is currently loss-making, but we believe we made a right decision", Chen Lang, chairman of China Resources Enterprise, was quoted as saying. "About 50 of our 80 breweries came through acquisitions. We have a track record of turning things around in three to five years."
Kingway's EBITDA margin at 12 percent is low by beer standards, which may derive from its focus on long shelf-life beer (360 days) for the mainstream market segment, says Glenboden, an advisor on M&A.
CR Snow, which already controls 22 percent of the Chinese beer market (2012), will see its capacity rise 8.5 percent with the acquisition of Kingway's seven breweries. Four are in Guangdong province, one of China's fastest-growing and most affluent regions, SABMiller said. The other breweries are in Sichuan, Shaanxi and Tianjin.
Buying Kingway will give CR Snow a much needed volume boost in Guandong Province's beer market. Based on 2010 figures, CR Snow and Kingway have about 5 and 9 percent respectively of the province's market by volume, with AB-InBev level with Zhujiang (independent) on 20 percent, said Glenboden.
However, growth in the region doesn’t come cheap. It is estimated that the deal values Kingway at 3.4 times 2011 price to book and 4.4 times enterprise value over sales in 2011, or 6.8 yuan (USD 1.10) for each litre of sales in 2011.
For comparison: Reports say that AB-InBev’s acquisition of Weixue Beer in Henan in 2011 cost 3.5 yuan per litre of sales, and Tsingtao Brewery's purchase of Xin Immence brewery in 2010, whose beers are mainly sold in Shandong province, cost 5.1 yuan for each litre of sales. Back in 2006, AB-InBev’s acquisition of Fujian Sedrin Brewery was valued at 8.2 yuan per litre of sales.
At 490 million hl in 2011, China is the world’s largest beer market but the country’s breweries are ripe for consolidation, as there are still a large number of local players – about 300 – operating in a highly capital-intensive industry. The top six brewers in China produce under 60 percent of the nation's beer, which by western standards suggests consolidation still has a way to go.
