Kirin buys full control of Australian craft brewer Little World Beverages

There is always some reason in madness. On 18 June 2012, in a surprise announcement, brewer Lion confirmed an agreement with the board of Little World Beverages (LWB) to acquire, by way of a Scheme of Arrangement, the 64 percent of shares in LWB it does not already own. The deal values LWB, a craft beer brewer, best known for its brand Little Creatures, with an estimated annual output of 80,000 hl beer, at about AUD 380 million (EUR 312 million) which is plenty of dosh.

LWB was founded in 2000 and was listed on the Australian stock exchange in 2005. For the six months to 31 December 2011 it posted a 22 percent increase in revenue to AUD 43.4 million and a net profit of AUD 6.1 million. In its past financial year LWB had a turnover of AUD 70 million (EUR 58 million) and an EBITDA of AUD 16.6 million (EUR 14 million).

The amazing thing about this deal is the amount of money Lion is prepared to pay: apparently it’s about 20 times EBITDA while Foster’s went for 12. Now spend a moment to let this information sink in. To all appearances, Lion’s owner Kirin has given its Australian unit Lion the carte blanche to buy whatever becomes available in the craft beer segment. It’s an interesting titbit that Lion could also end up with a 20 percent stake in Australian craft brewer Stone & Wood if the takeover of LWB goes ahead.

Under the Scheme, Lion will offer LWB shareholders AUD 5.30 per share in cash, or AUD 200 million (EUR 165 million), which is a 40 percent premium on LWB’s closing price on 18 June 2012, minus the amount of any dividend declared by LWB prior to the Scheme becoming effective.

This offer values the total LWB enterprise at over AUD 380 million (EUR 312 million). That’s a hell lot of money for such a small company. Needless to say, the LWB board recommends the Lion offer to shareholders. A vote on the deal is expected to be held in October 2012.

Here are the numbers: LWB has about 20 percent of the craft beer market which is about 400,000 hl or 1 million cartons. For comparison, Corona is perhaps 10 million cartons, Crown 9 million; VB, the major Foster’s brand, is about 20 million and Heineken is 5 million cartons, insiders say.

Market leaders in the craft beer segment are James Squire (also owned by Lion) with about 40 percent of the volume. Matilda Bay, owned by SABMiller/Foster’s, has 25 percent. As a matter of the fact, it’s the brewing bigwigs, SABMiller/Foster’s and Lion that control this segment.

The “true” (ie non-corporate) craft beer market is actually quite small at 15 percent (or 60,000 hl) and this is the source of a rancorous argument between craft brewing associations and which brewers dominate them.

Market observers say that LWB’s assets are nowhere near the market price paid. They have two breweries, one in Fremantle worth about AUD 40 million and one in Healseville worth about AUD 5 million. Besides, are currently building a third in Geelong near Melbourne for AUD 60 million, totalling AUD 110 million. That means that the deal values LWB’s brand equity at over AUD 200 million – not bad.

The major shareholders (there are five or six individuals) have walked away with AUD 30 to AUD 45 million each, we hear.

The general reaction suggests that there will be little "deleterious" change and that closer association with Lion will give the Little Creatures brand even better exposure and distribution.

Obviously, the takeover will further reduce the number of Australian-owned brewers, after Foster’s was bought by SABMiller in 2011. But more interestingly, it shows where Australia’s big corporate player Lion thinks the profit growth in the country’s stable beer market will be in the future: in the craft beer segment.

With Casella winery having entered the beer market recently, SABMiller’s former partner Coca-Cola Amatil could find the more profitable craft end of the beer market rather crowded when it re-enters in 2014.