Fitch: Beam, Oriental Deals Leave Room for More Drinks M&A

Thu Jan 23, 2014 8:54pm IST

Stocks

   

(The following statement was released by the rating agency) MILAN/LONDON, January 23 (Fitch) The recent acquisitions of Beam and Oriental Brewery leave room for further drinks sector M&A in Asia, Africa and the Americas, but acquisition prospects in Europe are limited, Fitch Ratings says. A combination of good cash flow, lower organic growth and improved ratings headroom for some drinks companies will make acquisitions attractive, after a lull last year. Carlsberg and SABMiller have the most flexibility for deals at their current rating among potential buyers in the beer industry. A recent modification to the Carlsberg Foundation’s statute will also make it easier for Carlsberg to make acquisitions that dilute the institute’s shareholding. Anheuser Busch InBev’s deal to reacquire Oriental Brewery leaves it with less headroom. We highlighted the potential for ABI to buy back Oriental in our December Outlook Report for the sector. We see the most likely remaining acquisition targets among brewers as San Miguel Brewery, where 48% holder Kirin could be a potential buyer of the remaining half of the business, and Compania Cervecerias Unidas (33% Heineken). More generally, Asia and Africa remain likely regions for further M&A because of the combination of a fragmented beer market and the potential for good growth in volume and prices. China, Korea, Vietnam and Thailand in particular offer opportunities to acquire independent operators. We believe stagnating demand and the already high level of consolidation in Europe will limit opportunities for acquiring local assets. However, companies producing exported drinks (eg whisky and cognac) remain attractive. The craft, cider and imported beer segments are growing strongly in the US, but the valuation of larger craft brewer Boston Beer Co. is very high and major brewers could face competition hurdles if they were to target the segment. In the spirits sector, Diageo and Brown Forman have the most flexibility for acquisitions at their current rating. We believe United Spirits’ Whyte & Mackay unit is also one of the most likely acquisition targets as anti-trust regulators may force its sale after Diageo’s acquisition of United Spirits. Competition regulators probably would not allow Pernod Ricard to buy Whyte & Mackay, but it is likely to be an attractive target for any company looking to enter the scotch market. Our Outlook Report also highlighted Beam as a potential takeover target in 2014 thanks to its portfolio of bourbon and tequila brands. The company announced last week that it would be acquired by Suntory. One likely impediment to deals across the drinks sector is that following the Beam acquisition virtually all the potential targets in either spirits or beer have a single major shareholder. This is generally either a controlling family or a private equity investor, who either may not want to sell at all, or may demand a high price. Our report “2014 Outlook: EMEA and US Drinks Companies� lists several other potential takeover targets and discusses rating headroom of industry participants. It is available from www.fitchratings.com. Contact: Giulio Lombardi Senior Director Corporates +39 02 8790 87214 Fitch Italia SpA Vicolo Santa Maria alla Porta, 1 20123 Milan Bill Densmore Senior Director Corporates +1 312 368 3125 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2014 Outlook: EMEA and US Drinks Companies here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.