We won’t soon see another deal like KKR’s $1.8 billion carve-out of Oriental Brewery. The year’s second-largest buyout was made possible by the combination of a motivated seller and an unusual capital structure.
According to a source familiar with the situation, KKR’s bid was actually the lowest of the three final offers — from Affinity Equity Partners and MBK Partners — but KKR won because its was the only offer with committed financing. This was important to Anheuser-InBev because the company is in a bit of a pinch to pay down debt: it has a $7 billion bridge loan due this fall. Anheuser-Inbev was so motivated, in fact, that it set up a $300 million PIK note for the deal, something that wasn’t necessarily offered to KKR’s competitors.
All in, the deal has 4x leverage. Beyond the PIK note, KKR secured senior debt from seven lenders to the tune of $750 million. Thanks to the PIK note, the deal requires no high yield or mezzanine sub debt, despite the slowly returning demand for junk bonds.
While the firm may have paid less than other buyers were willing to pay, that’s not to say KKR didn’t pay a fair price. The $1.8 billion deal value, which is the second-largest LBO in the world this year, represents an 8.4x Ebitda multiple (or, as low as 7.5X depending on how you view the PIK note).
Such a deal may have garnered 10x Ebitda in good times; today, its par for the course.
One curious thing about the deal is KKR’s partnership agreement with Anheuser-InBev. The announcement states that the companies will share best practices, and in five years, Anheuser-InBev will have the option to buy Oriental Brewery back at an agreed-upon price. At face value, it looks like the troubled parent company is sending its subsidiary away to private equity boarding school instead of doing a true divestiture. Does the firm not want to sell its Korean beer operations?
Well, no, not at all, as it turns out. “They had to sell something, and Oriental Brewery is a natural candidate because it’s run as a standalone business,” a source said. The stand-alone aspect is what made it so attractive to private equity firms, who won’t have to invest much extracting the company’s administrative functions from its conglomerate parent. Either way, Anheuser-InBev hopes to buy Oriental Brewery back in five or more years. KKR has agreed to give Anheuser-InBev the option to buy it back at a significant premium to its buy-in price.
That’s not to say KKR is merely a fee-collecting holding company for Oriental Brewery. The firm’s strategic plans for the company include capital investments. “This is not a cost-cutting deal for KKR because the company was run very lean given Anheuser-Inbev’s capital constraints,” the source said. KKR sees the deal as a growth investment, in which it will boost Oriental Brewery with sales, marketing and distribution investments as well as expanded plant capacity, the source said. In the meantime, the company will continue to share brewing techniques and practices with Anheuser-InBev, as Oriental Brewery will also license such brands as Hoegaarden and Budweiser.