KKR’s Korean brewery win fuelled by hot soup and soju sessions; KKR, Affinity to Sell Korean Brewer to InBev for $5.8 Billion after buying for $1.8 billion in 2009

KKR’s Korean brewery win fuelled by hot soup and soju sessions

1:04am EST

By Joyce Lee and Stephen Aldred

SEOUL/HONG KONG (Reuters) – A story Oriental Brewery boss Chang In-soo often tells about his days as a soju salesman is how he and two clients once worked through 29 bottles of the traditional Korean rice liquor at a single sitting. He feels bad, he says, they didn’t manage 30.His stamina in capturing 60 percent of the local beer market has been just as eye-catching, helping to explain why Anheuser-Busch InBev SA (ABI.BR: Quote, Profile,Research, Stock Buzz) has agreed to buy back the brewer for nearly three times the price it achieved five years ago when it sold it to private equity investors.

“‘The war is won on the ground’, that is what Chang knows, he motivates the sales guys to go out, pound the pavement,” said a source who knows him.

One anecdote colleagues tell of Chang’s motivational style recalls him turning up with his wife at 5 a.m. in the depths of the Korean winter to give out bowls of hot soup to dockworkers and drivers toiling in the freezing loading bays.

Oriental Brewery (OB) has certainly performed well in the five years under KKR & Co (KKR.N: Quote, Profile,Research, Stock Buzz) and Korea specialist Affinity Equity Partners. Core profit (EBITDA) increased 25 percent last year to $500 million – 2.3 times greater than when they bought it from InBev, which had retained an option to repurchase.

The $5.8 billion that AB InBev is paying to buy it back makes it the record inbound M&A deal into South Korea, ahead of Standard Chartered’s (STAN.L: Quote, Profile, Research, Stock Buzz) $3.3 billion agreement to buy Korea First Bank in 2005, Thomson Reuters data shows.

But if the returns made were stellar – the deal announced on Monday was Asia’s biggest ever private equity sale via M&A – the risk they took in buying the firm, in the depths of the financial crisis, were great.

The private equity partners set about reducing costs and boosting market share with new products and an aggressive sales drive. Celebrity endorsements from the likes of rapper Psy have been used to help target a younger audience for its Cass brand.

“OB was an old man’s beer, a beer you would say, ‘I don’t drink that, my granddad drinks that’. So they gave it a new image, they listened to what people wanted,” said the source.

“They created Cass Lite to appeal to women, created OB Golden Lager with more flavor because people wanted more flavor in their beer. And the sales guys took it out to the distributors and the bars and clubs.”

INDUSTRY VETERAN

The brewer’s debt was refinanced with cheaper loans from Korean banks.

An early move by the new private equity owners was to poach Chang, a 30-year industry veteran with little English and no college education, from then-market leader HiteJinro Holdings Co Ltd (000140.KS: Quote,Profile, Research, Stock Buzz), as sales chief in January 2010.

He overhauled the sales team and set about targeting the south of the country, HiteJinro’s stronghold, raising OB’s share of that market from barely double digits to around 40 percent, the source said.

Chang, who was promoted to CEO in June 2012, has told colleagues he drove more than 70,000 km (45,000 miles) in his first year at the company, an OB spokesman said, having meals and drinks with wholesalers and regional employees.

On the road he discovered that OB was damaging its beer’s freshness by pushing out inventory to boost monthly sales that then sat in wholesalers warehouses for up to 6 months.

That soon changed, as the company overhauled its distribution model as part of a wider restructuring.

Working alongside Chang has been KKR’s operations team known as Capstone – an internal consulting arm that boosted expenditure on equipment and improved the beer fermenting process, while overseeing cost reductions elsewhere including a $3.7 million saving on water and $17.7 million from cutting greenhouse gas emissions.

OB overtook HiteJinro as the country’s top beer producer for the first time in 15 years in 2012. Its market share has grown to around 60 percent of the country’s 4 trillion won ($3.8 billion) beer market, up from around 40 percent in 2009, according to trade group Korea Alcohol & Liquor Industry Association.

AB InBev, which said on Monday it would retain Chang as CEO, clearly believes there remains more room for growth, despite a fightback from HiteJinro and the entry into the saturated beer market of retail giant Lotte Group.

“Chang understands how to sell to Koreans,” said Choi Soo-ok, the chairman of Korea General Liquor Wholesalers Association, which represents 1,200 wholesalers throughout South Korea. “During the last time InBev owned OB, it was all statistics and bottom line. But Chang forges human relationships to move bottles.”

KKR, Affinity to Sell Korean Brewer to InBev for $5.8 Billion

CYNTHIA KOONS

Jan. 20, 2014 1:03 a.m. ET

Private-equity firms KKR & Co. and Affinity Equity Partners have agreed to sell South Korea’s Oriental Brewery back to beer giant Anheuser-Busch InBev SA BUD -1.91% for $5.8 billion, in one of the biggest private-equity transactions in Asia in recent years.

Belgium’s AB InBev sold Oriental Brewery to KKR in 2009 for $1.8 billion as part of steps to pay down debt following its $52 billion buyout of Anheuser-Busch in 2008. At the time, AB InBev and KKR agreed that the brewer could buy the business back at a multiple of 11 times estimated earnings before interest, tax, depreciation and amortization by July this year, people familiar with the situation have said.

Oriental Brewery estimates that its 2013 Ebitda was around $500 million, indicating that its sale back to AB InBev was done around that pre-agreed 11 times multiple.

Recent deals in the region have been done at higher multiples, in part because beer consumption in Asia is growing at higher levels than the rest of the world. A wave of recent consolidation in Asia’s beer market has also left fewer targets.

Oriental Brewery is the top beer maker in South Korea and one of the country’s biggest exporters. OB, as it’s known domestically, is the maker of Korea’s best-selling Cass brand of beer. The firm chalked up $63.3 million of exports in the first half of 2013, the latest available data from Korea Customs Office and Korea International Trade Association show.

Some of those sales are for third-party products like Blue Girl, which OB says is Hong Kong’s top beer with a market share of 38.8% in terms of sales in the city. OB’s Cass Red is also Mongolia’s top beer in terms of revenue. The brewery also makes Budweiser for consumption within Korea and is the only brewer of Hoegaarden in the world outside of the brand’s home, Belgium.

KKR sold part of its stake in Oriental Brewery to Affinity not long after agreeing to buy the company.

 

AB InBev to Pay $5.8 Billion for Korea’s Oriental Brewery

Anheuser-Busch InBev NV (ABI) agreed to pay $5.8 billion for South Korea’s Oriental Brewery Co. Ltd., regaining control of a company that became the Asian nation’s biggest brewer under KKR (KKR) & Co. and Affinity Equity Partners Ltd.

AB InBev will fund the acquisition with internal resources, according to a statement from the companies today. The Leuven, Belgium-based maker of Budweiser and Corona will receive about $320 million in cash when the transaction is completed.

AB InBev, the world’s biggest beermaker, is buying back a business it sold to KKR in 2009 for $1.8 billion when it sought to cut debt following InBev NV’s $52 billion takeover of Anheuser-Busch Cos. KKR subsequently sold 50 percent of the asset to Affinity. Since then, Oriental Brewery has become South Korea’s largest beermaker and more than doubled earnings, boosted by its Cass brand.

“On the surface, the deal seems odd as they’re paying more than three times for Oriental than what they sold the business for five years ago,” said Pablo Zuanic, an analyst at Liberum Capital. “However, this signals to us they see growth in South Korea — not so much in terms of market growth, but to improve share and drive the penetration of Budweiser and Corona.”

Korea’s beer market has grown about 2 percent a year from 2009 through 2012, the companies said. AB InBev plans to further develop Cass as well as throw its marketing support behind brands including Budweiser, Corona and Hoegaarden in the market.

AB InBev shares were little changed at 75.13 euros at 9:03 a.m. in Brussels. That gave the company a market value of about 121 billion euros ($164 billion).

Market Share

AB InBev, created in the brewery world’s biggest merger, has grown to be the largest beermaker through a series of acquisitions, including taking control of Mexico’s Grupo Modelo for $20.1 billion, a deal completed last year. Cost-cutting from that deal helped offset slumps in beer volume sold in the U.S. and Brazil, the company’s biggest markets in the third quarter of last year.

Oriental Brewery has boosted both market share and earnings since it was sold by AB InBev in 2009.

The brewer’s market share in South Korea is about 60 percent, up from about 40 percent in 2009, according to Lee Kyung Shin, an analyst at KB Investment & Securities Co. Hite Jinro Co. (000080), which sells liquor, beer and bottled water, has said that Oriental Brewery overtook it in market share in South Korea’s brewery market in 2011.

Ebitda Multiple

Earnings before interest, tax, depreciation and amortization at the maker of OB Golden Lager and Cafri were 529 billion won ($497 million) last year compared with 237.8 billion won in 2009.

Including debt, the deal values Oriental Brewery at about 11.6 times Ebitda, compared with the average 10.1 times for 24 global brewery acquisitions over the past five years, according to data compiled by Bloomberg.

KKR and Affinity had an option to sell the stake back to AB InBev in a deal worth the equivalent of 11 times Oriental Brewery’s Ebitda, according to people familiar with the 2009 transaction. AB InBev sold the business for about nine times Ebitda, people familiar with the deal said at the time.

AB InBev’s purchase would be the second takeover of an alcoholic beverage company this year after Japan’s Suntory Holdings Ltd. agreed to buy bourbon maker Beam Inc. for about $16 billion Jan. 13. Today’s deal is expected to close in the first half of the year, according to the statement. It’s subject to regulatory approval in South Korea.

AB InBev was advised by Lazard Ltd. and Deutsche Bank AG.

To contact the reporter on this story: Frank Longid in Hong Kong at flongid@bloomberg.net