Heineken\'s Dutch courage on Brazil looks merited
Carol Ryan of Reuters in London | Tuesday, 24 January 2017
Heineken hopes that Dutch courage will succeed where Japanese adventurism didn't. The beer company is in talks to buy the Brazilian unit of Kirin, and may pay $872 million, according to Japanese media. Landing a deal would give the company close to a 20 per cent market share, still well behind dominant rival Anheuser-Busch InBev. The target is loss-making, but Heineken has reason to believe it could do a better job.
The Amsterdam-based beer giant got a perch in the Brazilian market in 2010 when it bought FEMSA, owner of the Kaiser and Sol brands. It's currently the number-three player, holding around a 10 per cent market share, according to MarketLine research. AB InBev looms large with 70 per cent.
Although Heineken doesn't break out details on how the country is faring, Brazil has been a headache for brewers. AB InBev said beer volumes declined by 4.1 per cent in its third quarter year-on-year as a tough economy squeezes consumer incomes.
However, the country's massive beer market will be worth close to $60 billion by 2020, up from $40 billion in 2015, according to MarketLine. Heineken is maneuvering for a bigger slug of that growth.
A sale also suits the target's Japanese owner, keen to offload a 2011 investment gone sour. Brasil Kirin is forecasting a full-year operating loss for 2016, although the extent of its losses will narrow on 2015. Its market share has drained to 12 per cent from over 15 per cent since the acquisition, according to Jefferies.
The price looks commensurate. A mooted $872 million price tag, reported by business daily Nikkei, implies a valuation of 0.9 times forecast 2016 revenue of around $980 million. Heineken trades on a multiple of 2.5 times sales, Eikon data shows. Kirin, back in the day, paid 2.2 times forecast revenue for the business, called Schincariol.
Heineken has a few options for hauling the unit back to profitability. AB InBev's 38 per cent third-quarter EBITDA margin gives something to
aim for.
The Dutch group may have scope to slash operating costs by combining Brasil Kirin with its existing brewery and distribution network in the country.
And the extra market heft, as well as one rival fewer, may bring pricing power. By getting into position now, Heineken can profit when Brazil gets its swing back.