Global Economics

KKR to Pay $1.8 Billion for Korea's Oriental Breweries


The U.S. private equity fund enters into Korea's largest ever buyout by a financial sponsor

Kohlberg Kravis Roberts and Company (KKR) yesterday announced that it is to pay $1.8 billion to acquire Korean beer-maker Oriental Breweries (OB) from Anheuser-Busch InBev.

For Korea this deal sends a signal that the country is open for leveraged buyout business.

"There has been a lot of negative sentiment towards investments in Korea by private equity funds, so there was a great deal of skepticism regarding whether it would be possible to acquire such an iconic asset," says a source close to the deal.

Sources say that KKR was able to win the bid by hitting the right trigger points with the seller: InBev was primarily looking for a buyer that could provide both speed and certainty. Other interested parties included Korean food and retail company Lotte, and another private equity fund, MBK Partners.

There have been many rumors and leaks relating to the deal over the past few months and the official announcement clears up the uncertainty regarding the price, which some had said would be as high as $1.9 billion. The specifics relating to vendor financing were also being finalized, say sources.

InBev will book a non-recurring capital gain of approximately $500 million from the transaction but will continue to maintain a relationship with OB as KKR will acquire exclusive licenses to distribute certain InBev brands in Korea, such as Budweiser, Bud-Ice and Hoegaarden. The deal also includes a right for InBev to re-acquire OB within a five-year period, according to predetermined terms, suggesting that the drinks giant is retaining an option to come back to Korea at a more opportune time.

Although sources were unable to divulge how the option will be valued, it is certain to be at a significant premium to the price that KKR paid. Sources suggest that if the option were to be exercised, the private equity fund would be able to consider the deal a home run.

The transaction is part of an ongoing process where InBev is selling assets to pay off debt taken out for the purchase of Anheuser-Busch last year in an acquisition that cost $52 billion. At the end of January, Japan's Asahi Breweries paid InBev $667 million for a 19.9% stake in China's most famous drinks brand, Tsingtao Breweries. InBev retained a 7% stake.

Simultaneous with the announcement of the deal with KKR came the release of InBev's first-quarter earnings. In the period between January and March, Asia-Pacific revenue growth was 7.9%, or $84 million. In South Korea, sales volumes increased by 6.6%, mostly off the back of Oriental Breweries' brand Cass, which increased by 11.7%.

OB, alongside Hite, is one of Korea's largest breweries. As well as Cass, it produces other lagers such as OB Lager and Cafri. It was purchased by InBev in 1998.

On the buy-side, Goldman Sachs, HSBC, Nomura Holdings and ING Group are all advising KKR. Deutsche Bank, J.P. Morgan and Lazard are the financial advisers for InBev. The deal is expected to be completed in the third quarter of 2009.

This is the largest ever financial sponsor M&A buyout in Korea, exceeding the $1.2 billion buyout of Korea Exchange Bank by Lone Star Funds in 2003, according to Dealogic.

The deal also comes amid a relative drought of private equity deals both in Asia and worldwide. The transaction is the biggest buyout in the Asia ex-Japan region since the $2 billion acquisition of a majority stake in Honiton Energy Holdings by a combine of financial investors, Arcapita Bank and strategic investor Tanti Group (founders of Indian wind power company Suzlon) in July 2008.

Globally, this is the second largest private equity deal this year, following CVC Capital Partners' $4.4 billion acquisition of Barclays Global Investors' iShares division last month. Barclays provided 70% of the financing for that deal, putting up $3.1 billion, with CVC providing only 30%.

In the Korean deal, KKR has had to provide around 40% of the consideration as equity, say sources, with the balance 60% raised as debt. InBev is providing one-third of the debt, representing 20% of the total consideration, as vendor finance. The other $700 million of debt will be syndicated among a consortium of banks, which according to media speculation, includes some of the buy-side advisers as well as Standard Chartered and J.P. Morgan.

The relatively modest leverage of one-and-a-half times equity at which this deal has been financed is indicative of how the credit crunch has changed the way in which private equity firms are transacting deals. The days of leverage comprising 70% to 80% of the total consideration of sponsor-led deals are a thing of the past.

But the deal has still been done at a reasonable Ebitda multiple of around eight times, say sources.

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