A marriage of convenience

Kohlberg Kravis Roberts’ successful $1.8 billion bid for South Korea’s Oriental Brewery (OB) from Anheuser-Busch InBev in May was viewed as a landmark deal considering the paucity of large transactions in the last 12 months.

But it's clear the deal carries weight not just due to its size, but also because it could serve as a template for future transactions during this difficult financial cycle.

The OB transaction was essentially a case “where the seller does not actually want to sell an asset, but needs the liquidity”, as one fund manager commented – an all too common situation in today’s economic environment.

InBev needs capital to repay debt accruing from its $52 billion acquisition of Anheuser-Busch in November 2008. The sale of OB was part of the company’s de-leveraging programme, however, it has been careful not to relinquish all of its rights to South Korea’s second largest brewery: a joint statement from InBev and KKR noted that InBev would have “an ongoing interest in OB through an agreed earnout”. It also stated InBev would have the right, but not the obligation, to reacquire OB within five years after the closing of the transaction at “pre-determined financial terms”.

Those “pre-determined financial terms” have not been disclosed, but sources close to the transaction told Bloomberg that KKR acquired OB at eight to nine times EBITDA and that InBev will be able to buy it back for 11 times EBITDA.

For KKR, the opportunity to deploy capital was no doubt as welcome as a cool drink in the desert. Not only that, but from the information available, it is clear the firm has in place a capped contractual return if InBev exercises its right to buy OB back. Just the multiple expansion from eight times EBITDA at purchase to 11 times EBITDA at sale would provide a healthy floor on KKR's returns – even before taking into account the results of any streamlining initiatives or growth strategies the firm might implement in the meantime.

As one GP noted, a deal like this represents a sort of a compromise reached between a reluctant vendor and pragmatic buyer in straitened times. The buyer is accepting the possibility of capped returns and the vendor is effectively raising capital which is likely to end up more expensive than the cost of raising new debt would be if the credit markets were in better shape.

Still, as compromises go, this one is a win for both parties. The better the business does, the better the overall return for KKR, while InBev can rest assured it will be able to buy back a well-performing business at a pre-agreed price once it gets its finances into better shape.

As a blueprint for buyout transactions in times of scarce credit, the OB deal is a viable and appealing model. Since we have yet to see the much-awaited “turn” in the markets, we should expect to see more such deals follow.