StarBev on the block?
Who would have thought: while Budweiser Budvar's CEO and the Czech Minister for Agriculture continue with their public slugfest, several parties, including brewers Heineken, AB-InBev, Carlsberg, SABMiller, Molson Coors, Asahi as well as private-equity outfits, are rumoured to be interested in taking over the central European brewer StarBev, also headquartered in the Czech Republic. The Wall Street Journal broke the news on 22 February 2012.
Many think AB-InBev is the most probable buyer of StarBev, as the company has the right of first offer, has many links to StarBev through several licences and has sufficient capital to pay the estimated USD 3 billion that is allegedly required for StarBev.
StarBev is a 13 million hl brewer (2010) with interests in Bosnia-Herzegovina, Bulgaria, Hungary, Croatia, Montenegro, Romania, Serbia, Slovakia and Czech Republic. The company is led by the Belgian CEO Alain Beyens. The marketing director is another Belgian, Frederic Landtmeters.
Both had long careers at AB-InBev. Alain Beyens was the head of Eastern and Western Europe. He left the brewer in 2009 because he wanted to be CEO himself. Mr Beyens is also an independent director at the Belgian brewer Duvel Moortgat.
But there are other links between StarBev and AB-InBev. StarBev is the former central European division of AB-InBev, which was sold to CVC private equity in 2009 to help AB-InBev reduce its debt following the acquisition of U.S. market leader Anheuser-Busch in 2008.
According to a press release announcing the sale to CVC, AB-InBev's disposal totalled USD 2.2 billion, plus "additional rights for a further payment of up to USD 800 million." That adds up to USD 3 billion – or the rumoured asking price for StarBev by CVC.
The Belgian publication Trends rightly wondered: "Could it be that CVC Capital Partners will book no profit on the sale after almost three years?"
While a re-sale to AB-InBev would seem logical – StarBev brews and sells several AB-InBev brands including Stella Artois, Beck's, Hoegaarden and Leffe in the countries where it operates; in turn, AB-InBev brews the Czech StarBev brand Staropramen in countries where StarBev is not active – we at Brauwelt still harbour several reservation.
Our major objection is that the central European market is not that interesting anymore for AB-InBev as the brewer is focusing on high-profit markets in the Americas and China.
In the year before the sale (2008) to CVC, AB-InBev's profit contribution from central and eastern Europe, which included Russia and the Ukraine, was only 7 percent of total EBITDA. Central Europe's profit contribution was much less – 3 percent – if Nomura's estimate of USD 180 million in EBITDA in 2008 is correct. These days it would be even less.
Since then, most central and eastern European markets have been in decline and margins are under pressure given fierce price wars among Heineken, Carlsberg and SABMiller. Heineken CEO Jean-François van Boxmeer elaborated on these at Heineken's full year 2011 results presentation on 15 February 2012.
That's why we don't think that the usual suspects – Heineken, Carlsberg and SABMiller – would be overtly keen to splash out USD 3 billion for StarBev. They have all had their share of problems in the region in recent years. Moreover, all of them would run against serious competition hurdles.
Carlsberg is already strong in Bulgaria, Croatia and Serbia. Heineken is a leading player in Bulgaria, Hungary, Romania, Slovakia and the Czech Republic. SABMiller has key positions in Hungary, Romania, Slovakia and the Czech Republic.
From what we have heard, though, several interested parties have been circling StarBev for almost a year now. This is probably the reason why CVC has been working with bankers Nomura to assess a number of approaches. It is not clear if CVC will chose to sell the business. By rule of thumb, private equity likes to keep businesses for a period of three to five years before exiting (ie selling them on).
In view of the above, we at Brauwelt think it more likely that another private equity firm might wish to take StarBev on for the time being – say another three to five years. The interesting thing is that some private equity firms may have access to cheap money and StarBev may be generating way more than the cost of financing such a deal. This could be an incentive for CVC to sell now.
Admittedly, we don't know if AB-InBev also has the right of first refusal, but given the fact that there is no strategic buyer (ie another brewer) who would want to buy StarBev, we don't think that AB-InBev will worry too much if StarBev takes another "private equity holiday".
What does this all come down to? We think that CVC may wish to look at opportunities where they can make their expertise and financing power work harder than the declining returns they are likely to see (and perhaps have seen already?) on their investment in StarBev. So a game of musical chairs – from one private equity firm to another – may be preferable to sitting still as far as CVC is concerned.
These StarBev breweries and private equity stories are increasingly about portfolio management and nothing more.
The love for the honest pint is a romantic notion that probably died in 1964 ... or was it 1664 (perhaps a not so subtle pun)?
