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China Resources Beer (CR Beer) launched a HK$9.5 billion ($1.2 billion) rights issue on Wednesday, the biggest in Hong Kong for more than two years, to part-fund the buyout of its SABMiller joint venture China Resources Snow Breweries (CR Snow).
The long-anticipated transaction for the outstanding 49% stake that it doesn't already own follows the merger announcement late last year of global brewing giants Anheuser-Busch InBev and SABMiller, which promises to create a company with almost a third of the world’s beer market, naturally giving rise to anti-trust concerns.
The beer brewing unit of state-owned China Resources Holdings said in a stock exchange filing that it will issue 811 million rights shares at a deeply discounted HK$11.73 per share -- 30.76% below CR Beer’s HK$16.94 Tuesday share price close.
CR Beer plans to issue one new share for every three shares already held, implying an immediate dilution of 25% for shareholders that decide not to subscribe to the new shares.
China Resources Holdings said it will fully subscribe to its own entitlement as well as underwrite the remainder. As such, the CR Beer parent has a 51.67% stake that could rise to 63.75%.
The proceeds from the rights issue will be used to help finance the $1.6 billion acquisition of the 49% CR Snow stake from London-listed SABMiller.
China Resources Holdings has made no secret of the fact that it wanted to buy all of CR Snow. In May last year, the group purchased the non-beer assets of CR Beer, which was then known as China Resources Enterprise, for $3.6 billion. The move was seen paving the way for the CR Snow purchase by establishing a standalone company fully focused on the beer business.
Analysts believe the partial divestment of CR Snow is a strategic play that allows SABMiller to reduce its market share in China in order to win antitrust approval from Chinese regulators.
AB InBev has approximately 15.9% of the market in China through local brands such as Harbin Beer and Sedrin Beer, while CR Snow has a roughly 30% market share, according to analyst estimates. So if SABMiller held onto CR Snow, the merger would likely be rejected by China’s Ministry of Commerce, the country’s key antitrust regulator.
Consolidation
Adding CR Snow into its beer portfolio will allow CR Beer to become the top player in China, one of the largest beer markets in the world.
China is already the world’s largest beer market by sales volume and it is expected to overtake the US by sales value next year, according to EuroMonitor.
CR Beer is expanding at a time when the industry is going through a wave of consolidation. With 70% of the market cornered by the top-five beer manufacturers including Tsingtao Brewery, Beijing Yanjing, and Carlsberg, the bigger players are eager to take over smaller companies in order to expand their brand portfolios and solidify their market share.
The $1.6 billion price tag for 49% of CR Snow values the company at approximately $3.2 billion, equating to 5.5 times EV/Ebitda on a historical basis and represents a steep discount to CR Beer’s EV/Ebitda multiple of 9.4 times.
The acquisition will be earnings accretive and is expected to boost CR Beer’s earnings per share by 96% in the 2017 financial year and 91% in 2018, according to Jacqueline Ko, an analyst at Maybank Kim Eng Securities.
CR Beer is undertaking a rights issue for the acquisition because it believes the plan could allow existing shareholders to invest in the company’s future development, chief financial officer Po-sing Lai said in a press conference on Wednesday.
The remaining $400 million acquisition cost will be funded by internal resources, bank borrowings or undrawn credit facilities from the parent, Lai said.
It is worth noting that the rights issue, which has priced at a 30.01% discount on a five-day volume weighted average price basis, is not conditional upon the completion of the CR Snow purchase. So shareholders willing to participate in the rights issue will bear the risk of the acquisition failing.
In that respect, there is a recent precedent when Hong Kong property developer New World Development offered to buy out its Chinese unit for $2.4 billion in early 2014.
The deal was announced simultaneously with a $1.7 billion rights issue to help fund the deal but the rights issue was subsequently concluded before shareholders voted against the privatisation offer, causing New World Development shares to plunge by 17% on the next trading day.
Under the deal timetable, shareholders will need to own CR Beer shares by the end of July 15 in order to be eligible for the rights issue. Subscription for rights shares end on August 9 and become tradable on August 19.
Nomura and UBS are joint bookrunners of CR Beer’s rights issue. They are also joint lead financial advisors to CR Beer on its partial offer for CR Snow. Nomura, UBS, Citigroup and HSBC are the joint lead managers.
