Comment - Wehring's Way: SABMiller & Kingway - Have You Got What You Paid For?
Kingway gives SABMiller a stronger presence in Guangdong
We journalists do like a good adjective. Honestly, you can't beat a strong descriptor to get a reader's attention.
So, when an analyst suggested that SABMiller's CR Snow JV had paid an “eyewatering” price for Kingway Brewery in China, a lot of us journos sat up and took a sip of coffee.
When SABMiller announced the purchase of Kingway earlier this week, we were keen to find out how the brewer had beaten Anheuser-Busch InBev, Tsingtao Brewery and Carlsberg to the prize.
Then, we saw the price tag.
With Bernstein's Trevor Sterling bandying the offending adjective around, US$864m was the obvious reason for SABMiller's win. Indeed, as Sterling highlighted, at around 30x (last 12 month's) EBITDA, the purchase price looked bonkers, compared to A-B InBev's move for Grupo Modelo (16x EBITDA on incremental basis) and Ceverceria Nacional Dominicana (around 25x historical EBITDA) and Heineken's takeover of Asia Pacific Breweries (17x EBITDA on incremental basis).
Then, in volume terms, SABMiller has paid the equivalent of $60 per hectolitre. Sterling also estimated that building a new brewery from scratch in China works out at costing around $25 per hectolitre.
Eye-watering sounds about right, then.
But, naturally, SABMiller won't quite see it that way. And, I can kind of see why.
The last few months have not been kind to Kingway: The listed company, majority-owned by GDH, was put up for sale a year ago as it struggled to turn a profit. Since then, things have gone from bad to worse for the brewer, which posted losses in the first half of 2012 and will almost certainly report full-year losses in the coming weeks. It would appear that the sales process has diverted the management's attention in 2012. So, the potential for improvement is clearly there.
Bear in mind, also, that Kingway's seven breweries are running at only 65% utilisation: That's quite some capacity headroom, right there.
Another justification is that Kingway has an existing distribution footprint, which is gold dust to any acquiror in a market like China.
Finally, the majority of Kingway's efforts are concentrated in the southern region of Guangdong. With a population of just over 100m, and a GDP rate that's still growing, growing, growing, the future for the province – and for brewers with a healthy presence there – looks rosy. CR Snow, can boast only a high single-digit share of Guangdong's beer market. Kingway has around mid-teens. Combine the two, and SABMiller's JV will triple its share in the province.
Granted, SABMiller is set to pay top dollar. But, as one industry observer told me, organic growth in China is proving harder to come by as growth rates slow.
Ultimately, then, you're going to have to be prepared to pay a premium for an existing asset.
As for the future, I leave the final word to the aforementioned industry observer: “The bigger challenge for brewers in China is how to move from a relatively undifferentiated, run-of-the mill portfolio to a more versatile range of brands - and to actually build brands that consumers connect with rather than ‘famous labels’ - including more premium offerings.”
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