Comment - Kirin Defies Doubters to Seize Schincariol

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Kirin Holdings has cleared a major hurdle in agreeing to take full ownership of Schincariol, but now the real work begins.

The Japanese brewer's deal to acquire the remaining shares in Schincariol was always going to be the quickest way to put an end to a legal dispute with those same shareholders. Kirin will pay BRL2.35bn (US$1.3bn) to do just that.

Taken together with Kirin's earlier deal to acquire a 50.45% stake in Schincariol for BRL3.95bn, the total price for the Brazilian brewer still looks quite expensive. It values Schincariol at around 13 times EBITDA, which means, in other words, that Kirin is paying top dollar for a business that is a distant market number two in Brazil and sells mostly cheap beer.

All things considered, though, Kirin has done a reasonable job of transforming its prospects. In August, analysts worldwide quizzed the firm's agreement to buy 50.45% of Schincariol in a deal that valued the Brazilian group at a whopping 20 times EBITDA. Consequently, not only has Kirin succeeded in placating unrest among Schincariol's remaining family shareholders, but it has reduced the price ratio to something that can be at least compared to other brewing industry deals.

For all that, the real slog is only just beginning. In 2010, Schincariol had a volume market share of around 11% in Brazil, versus a 70% share for Anheuser-Busch InBev's AmBev unit. During 2011, AmBev has been creeping into Schincariol's stronghold in north-east Brazil. 

Schincariol's portfolio mainly consists of economy beers, at a time when AmBev and other brewers, including Heineken, are trying to develop the premium end of the market. Faced with AmBev's implacable scale, and considering Brazil's emerging middle class, surely Kirin will have to try to take Schincariol upmarket? 

Profitability at Schincariol is an issue. In 2008, the group reported losses of BRL127m, but bounced back to profits of BRL75m in 2009. Last year, profits fell by 28% to BRL54m. However, thanks to investment in production capacity, sales have been heading north, spiking by 11.3% in 2009, to BRL2.6bn. In 2010, sales rose by 9.4%, to BRL2.85bn.  

It won't be easy, but at least Kirin will not have to face the kind of boardroom friction that looked inevitable had it not been able to acquire full ownership. Now, the Japanese brewer needs to make a swift impression. 

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