Kirin Holdings under fire for overpaying on Schincariol

Kirin Holdings under fire for overpaying on Schincariol

Kirin Holdings has dumped a great wad of cash into the eager hands of Schincariol's ruling shareholders - BRL3.95bn (US$2.6bn) to be precise. Here, just-drinks looks at the market reaction to the deal.

This Schincariol business is curious. On the one hand, Schincariol is one of the last opportunities to gain any scale worth talking about in one of the world's most promising economies. 

Add this to Japanese drinks firms' obsession with overseas expansion, plus the widely-held notion that takeover targets in beer are dwindling worldwide, and you can begin to understand why Kirin's execs found themselves on a plane to Rio de Janeiro.

What happened when they got there is another matter. On arriving in Rio, Kirin presumably chose to ignore that half of Schincariol's family shareholders were threatening legal action against any buyer, that the company sells mainly cheap beer, makes very little money and sells around one beer for every seven sold by Anheuser-Busch InBev's AmBev, which utterly dominates the market. 

What, however, seems most strange is that, knowing this, Kirin agreed to value Schincariol at 20 times the Brazilian brewer's EBITDA for 2010, and pay cash. The average valuation in brewing industry deals is around 12 times forecast EBITDA.

"We remain intrigued as to what Kirin sees in Schincariol to pay such a rich - maybe even unprecedented - valuation," said JP Morgan analysts yesterday (2 August). Schincariol is Brazil's second biggest brewer, with an 11% volume share, but market leader AmBev has a 70% share.

"In terms of profitability, the differences are also notable," said JP Morgan. "Schincariol makes a 15% vs AmBev's 50% EBITDA margins."

Reuters' Breakingviews columnist Rob Cox said that the valuation of the deal "looks like an extravagance". He said: "By any measure, Kirin is overpaying, has no obvious mechanism to extract value and is drifting from its geographic strategy." Ouch. 

MF Global analysts were more upbeat on the deal, but sounded a cautious note: "We feel Kirin will likely go some way towards premiumising Shincariol’s portfolio, though we note that the company has said it will keep current management in place," they said. 

Kirin has said that it expects Schincariol's net profits to rise ten-fold by 2015 and that it expects the deal to add to operating profits by the second year following the acquisition. 

"Profits at Schincariol are low now, but are being suppressed by high amortisation costs due to a lot of up-front investment in 13 factories in Brazil, and because the founding family have been putting their peronal expenses through the company," said MF Global.

On the top-line, Brazil is in a sweet spot economically and this is expected to continue boosting beer sales. The Wall Street Journal noted that Brazil's beer consumption "jumped 11% in 2010", citing industry figures. 

Kirin, though, is likely to have to wring some changes at Schincariol. A major barrier to that could be the remaining family shareholders. Yesterday, these shareholders - three cousins - were reported as calling the Kirin deal illegitimate. Kirin, for its part, has said that it quite fancies buying the three cousins out. 

Feuding in the Schincariol camp - probably together with high price expections - has already dissuaded some other brewers, SABMiller, Heineken and Diageo, from getting involved.

As for the direct effects on AmBev, most analysts predicted little immediate impact. MF Global said: "We believe competitive intensity would have been higher had SABMiller been the successful acquirer."    

Nevermind AmBev, for now, Kirin has a job on to justify this deal.