Following the trajectory in other major markets, Brazil looks ripe for a round of beer consolidation to create a stronger number two behind Anheuser-Busch InBev's AmBev unit. It's an open question, however, as to whether Heineken or Kirin Holdings will win the race; the key could be in deal structuring and valuation.

Major market consolidation story ...

Brazil is the fourth largest global beer market. With a 2010 growth rate of some 10%, annual per capita consumption at a still modest 54 litres, and favourable demographics, it's also one of the most attractive.

Petropolis is the last major player to remain independent (see chart). M&A history would suggest, however, that either Heineken or Japan's Kirin Holdings will take them out within a few years, in order to become the clear number two player in Brazil.

In the first half of 2012, both of these international groups have been rumoured to be preparing a bid for Petropolis, a privately-held group about whom little financial information is available.

... two global players lined up ...

Through acquiring FEMSA Cerveza in Mexico in 2010, Heineken made a step-change in its market position in the Americas, becoming the second largest brewer in Mexico behind Grupo Modelo, and a significant player in Brazil.

Kirin achieved a similar feat in 2011, when it acquired a majority stake in Schincariol from its founding family, in what turned into an acrimonious stand-off with the target's minority shareholders.

It's unclear which of the two groups will eventually win over Petropolis; if there's any clue in deal structuring however, then Heineken might have the upper hand.

... Heineken's deal to lose?

Kirin's purchase of Schincariol was both troubled and fully-priced. According to Kirin itself, on the basis of normalised LTM03/2011 EBITDA the enterprise valuation came to 15.7x EBITDA, or nearly 3x net sales revenue.

By contrast, Heineken acquired FEMSA in an all-share deal, through which it surrendered about 20% of its diluted equity, but at the relatively low valuation of 10.9x EBITDA (Glenboden's estimate).

That valuation can only reflect the fact that the economic value of Heineken's shares was worth more to the owners of FEMSA than the equivalent in cash.

Perhaps Heineken can replicate such a deal structure with Petropolis ?

This piece originally appeared on Glenboden's website.

Glenboden is an independent M&A advisor of over 20 years standing, specialising in food & beverages. On a quarterly basis, the company produces actionable, forward-looking M&A leads and agenda–setting insights on major M&A stories in food & beverages, that can be found here. Sign up to receive Glenboden's free quarterly newsletter here.