An undisclosed bidder has apparently offered around US$6bn for San Miguel Corp's majority stake in San Miguel Brewery. The 'elephant in the room' is surely that the bidder in question is Kirin Holdings. Stefan Kirk examines the potential valuation of a potential deal, and the possible add-on consolidation of Mahou San Miguel in Spain.

Valuation quite modest ...

In spite of San Miguel Brewery's (SMB) strong growth and profitability, the $6bn price tag, quoted by San Miguel Corp's president, sounds more like the brewer's enterprise value than a bid for 51% of its equity.

With Kirin already owning 48% of SMB since 2009, it's hard to imagine any global brewing major acquiring SMC's 51% and have to live with Kirin as its bed-fellow. That eliminates the scenario of a bidding war.

Of course, the majors do sometimes team up with each other or with regional players; just under three years ago, SABMiller swapped its Russian and Ukrainian beer operations for a 24% stake in Turkish brewer Anadolu Efes. However, Kirin's M&A history suggests there's little chance of such a construction with SMB.

... Kirin's beer M&A precedents ...

In 2009, Kirin bought Lion Nathan in Australia; in 2011 the groupsnapped up Schincariol in Brazil. In both cases, Kirin ended up with 100% of the shares; also in both cases it started with smaller stakes (50,5% and 46% respectively).

This pattern is likely to continue with SMB; especially given that the 2009 share purchase agreement, under which Kirin bought an initial 43% stake in SMB, probably contains clauses governing a potential buy-out of SMC's majority stake.

On the valuation side, Kirin may be anxious to avoid the charges of overpaying, that applied when it acquired control of Schincariol of Brazil in 2011 at an enterprise value of x16 EBITDA. In that context a ratio closer to the beer sector M&A average, in the low teens, is more realistic for SMB.

... 'tied deal' with SMC strategic acquisition ...

According to a recent interview with SMC's president, the sale of SMB is a 'tied deal' with the upcoming acquisition by that group of a US$10bn turnover regional company (presumably in either energy, oil & gas or infrastructure).

For reasons of timing and relative valuation psychology, SMC may opt for a bilateral settlement with Kirin over SMB, to avoid an unpredictable competitive tender process. That would also preclude an inflation of SMB's valuation.

... threat and opportunity of Mahou San Miguel

Another piece in this puzzle is the status of SMB's relations with its Spanish counterpart, Mahou San Miguel, brought under the spotlight by a co-operation agreement signed by the two 'independent and parallel' groups earlier this year.

The objective behind the agreement is to co-ordinate efforts to position 'San Miguel' as an "iconic brand" worldwide. Moreover, it seems to be necessitated by the increasing threat posed to SMB by MSM beyond Europe.

Hitherto limited to Spain and European export markets, MSM made its first production investment outside Spain by establishing Arian Breweries in India in 2012. We also understand that MSM has been exploring similar investments in Africa.

Does the above threat also present a bolt-on M&A opportunity to Kirin as potential 100% owner of SMB ?

Although MSM is a privately-held company, it has been hit hard by declining beer consumption in its home market of Spain; that provides rationale for MSM's consolidation into a geographically more broadly-based group.