AB InBev divestments provide opportunities, but not for other brewers

Author: Paul Curran

Date published: 28 Jul 2009

The US$52 billion acquisition of Anheuser-Busch by InBev took the new company's debt levels to higher than those of any other major brewer, and so AB InBev is continuing to divest non-core assets to pay down debt. In doing this it has tried to ensure divestments have minimal operational impact by setting up agreements with the new owners. Furthermore, it has avoided divesting to direct competitors, instead favouring deals with private equity partners.

AB InBev forced to sell Labatt's US business

As part of the regulatory process with regard to the Anheuser-Busch InBev deal the US Department of Justice required A-B InBev to divest its Labatt business in the US. It sold the business to KPS Capital Partners for an undisclosed amount. As part of the deal A-B InBev is licensing the Labatt brand to KPS in the US and has a minimum 3-year supply deal for the Labatt brand. KPS has also agreed to buy New York's High Falls Brewing Company, and has gained the licence for the Seagram's Cooler Escapes and Smooth brands.

Another example of where it has divested to pay down debt, but maintained its operational integrity, is the sale of part of its US metal can packaging assets, which were bought by the Ball Corporation, a supplier of packaging to the drinks industry, for US$557 million. AB InBev entered into a long-term supply agreement with the Ball Corporation as part of the deal to supply cans and lids.

Company divests stake in Tsingtao

AB InBev has divested its 27% stake in Tsingtao, the second largest Chinese brewer, with Asahi paying US$667 million for a 19.9% stake and private investor Chen Fashu paying US$235 million for a 7% stake. The Chinese regulator imposed restrictions as part of the approval of the Anheuser-Busch deal, stating that the brewer would have to get government approval to increase its stake in either Tsingtao or Guangzhou Zhujiang (in which AB InBev holds a 28.6% stake). The divestment of Tsingtao could clear the way for other acquisitions in China if AB InBev wishes to increase its presence in the country in the future, with Henan Jinxing being a possible target. The divestment of the stake made strategic sense; AB InBev can concentrate and invest in its own operations in China, which have recently performed below the market average, it gains a large sum of cash to pay down debt and clears the way for other acquisitions without governmental regulatory concerns. For Asahi, it gains a revenue source from outside its declining domestic market and complements its existing small assets in China.

Sale of Oriental Breweries

KKR, a private equity company, has acquired AB InBev's South Korean business for US$1.8 billion. AB InBev retains a relationship with the unit through an agreed earn-out, licence agreements, best practice exchange and a right but not obligation to re-acquire the assets within five years at a pre- determined level. KKR, in turn, sold a 50% stake in the company to Affinity, another private equity company which has experience of operating in South Korea as well as previously successful deals in the country.

The fact that AB InBev may want the asset back within five years and will have to buy it back at a premium makes the deal an attractive prospect for both KKR and Affinity. If AB InBev does not wish to have the asset back several of the other large global or regional brewers may pounce on the asset, which again is attractive to both of its private equity owners.

Rumours of Eastern European disposals

Recently, rumours have surfaced that AB InBev is looking for a buyer for its Eastern and Central European business, excluding its Russian and Ukrainian operations. The majority of these markets offer mid to long-term growth potential, but some have been heavily hit by the recent economic crisis, so a disposal in the short term is a good option. Major global brewers could be interested in the assets but would be hampered by their own recent acquisitions, thus needing to service large finance payments and meet regulatory requirements. Private equity companies would again appear to be the answer for AB InBev, especially if the company can negotiate a buy-back clause like it did with Oriental Breweries. This would also mean that AB InBev's direct competitors would not be able to acquire the assets, at least in the short term.

Other non-core divestments possible

The fact that AB InBev has stated that it is looking to divest non-core assets suggests that the entertainment division acquired in the Anheuser-Busch deal may also be up for sale. This is a substantial operation, with several theme parks in the US. When the Anheuser deal originally went through analysts thought that it could be worth over US$3 billion and was certainly going to be sold. Recent financial events may have put off potential bidders due to the financial crisis being likely to affect this business and the lack of credit available. With access to credit currently restricted, this may be presently out of reach of interested parties. The unit should be a key asset to the disposal programme and could be sold as soon as a bidder puts in a fair offer.

A-B InBev's current disposal strategy offers protection and options

Currently, AB InBev's disposal agreements have given it protection from its nearest competitors whilst raising much needed cash to pay down debt, and giving it options for the future. The option to buy back assets after a certain period gives AB InBev breathing space over the short term and the company can then assess if the asset is worth buying back later depending on its financial situation and business strategy at that point..

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