Latin America: SABMiller to buy Colombia's Bavaria
SABMiller plc announced on July 19 a major investment in Latin America through a transaction with the Santo Domingo Group (the “SDG”) in which SABMiller will obtain a controlling interest in Bavaria S.A. The Transaction will be effected by way of a merger, and will result in the SDG owning an economic interest of approximately 15.1% in SABMiller. The implied equity value of Bavaria is $4.8 billion and, including net debt and minority interests, the total implied enterprise value for 100% of the Bavaria group is approximately $7.8 billion.
Bavaria is the second largest brewer in South America with leading market positions in Colombia (99% of the beer market), Peru (99%), Ecuador (93%) and Panama (79%) where its key brands are Águila, Cristal, Pilsener and Atlas, respectively. The combined business will have annual beer volumes of approximately 175 million hectolitres, pro forma aggregated net revenues of approximately $12.5 billion and pro forma aggregated EBITDA of approximately $3.5 billion.
Bavaria is highly complementary to SABMiller’s existing operations and provides access to a major additional source of profitable growth in one of the global beer industry’s most strategically important and fastest growing regions. The Andean region of South America is forecast to achieve a compound annual growth rate in beer volumes of 4% over the next five years, well in excess of the global industry average of approximately 2%.
Following the Transaction, SABMiller will have a leading position in South America, in addition to its existing strong positions in the USA, Europe, Africa and Asia, establishing SABMiller as a leading brewer across 5 continents. Bavaria will further diversify SABMiller’s existing portfolio of businesses and brands in highly attractive growth markets.
SABMiller has a successful track-record and demonstrable experience in the management of comparable operations in developing markets. It believes that the application of its best operating practices will enable it to generate significant earnings enhancement in Bavaria, continuing the positive revenue and earnings momentum that Bavaria has experienced in the last several years. SABMiller intends to reduce Bavaria’s operating costs and invest in the development of a portfolio of distinct and differentiated brands to drive further revenue growth.
Annual cost synergies and operating improvements are estimated to reach $120 million by March 2010. SABMiller also expects substantial profit improvements from revenue enhancement initiatives over the same period.
On a pro forma basis, the Transaction is expected to be earnings per share accretive, before cost and revenue synergies for the pro forma financial year ending 31 March 2006.
The Board is confident that the IRR of the Transaction is comfortably in excess of its cost of capital and that based upon its assumptions, the Transaction will generate positive economic profit by the fifth or sixth full financial year of ownership.
Pursuant to a merger between a subsidiary of BEVCO LLC (“BC”) (the holding company of the SDG’s interest in Bavaria) and a wholly owned subsidiary of SABMiller, SABMiller will obtain BC’s indirect 71.8% interest in Bavaria and will issue 225 million SABMiller ordinary shares (the “Consideration Shares”) with a value of approximately $3.5 billion to the SDG based on a weighted average US$ SABMiller share price agreed between the parties. As a result, BC will own an economic interest of approximately 15.1% in SABMiller and will be subject to a five year lock-up, subject to certain exceptions including limited disposals from the third year. BC will have the right to nominate two directors for appointment to the SABMiller Board. In addition, Alejandro Santo Domingo and Carlos Alejandro Pérez, members of the executive committee of Bavaria’s Board, will serve as Vice Chairmen of a newly created board which will have oversight of SABMiller’s operations in Latin America.
Following completion of the Transaction, SABMiller will make a cash offer to acquire the shares held by minority public shareholders of Bavaria in Colombia, at a price per Bavaria share of $19.48, which is the value per share that was used as a reference for the Transaction. SABMiller will also make a cash offer to acquire the listed voting “A” shares in Bavaria’s subsidiary in Peru, and has agreed to acquire for cash certain minority interests in certain other subsidiaries. The total cash requirement for these transactions (together the "Minority Transactions") is estimated to be approximately $2.1 billion.
Bavaria’s turnover and EBITDA for the year ended 31 December, 2004 under Colombian GAAP was $1,904 million and $797 million respectively. In the first quarter of 2005, Bavaria reported an increase in turnover of 18% to $496 million and an EBITDA increase of 24% to US$212 million. On this basis, Bavaria’s last twelve months EBITDA to 31 March 2005 was $837 million. Trading in the second quarter of 2005 has been strong and Bavaria expects to show a higher year on year growth rate than that achieved in the first quarter of the year.
On an IFRS basis, the estimated underlying EBITDA of Bavaria for the year ended 31 December 2004 was approximately $737 million. The principal differences between Bavaria’s Colombian GAAP and IFRS EBITDA for the 2004 year relate to reclassification of items shown as non operating costs under Colombian GAAP to operating costs under IFRS.
As at 31 December 2004 Bavaria had gross assets of approximately $5.2 billion, profit before tax of $430 million and net debt of $1.9 billion on an IFRS basis. The combined business will have a strong balance sheet with an estimated pro forma net debt to aggregated EBITDA ratio of approximately 1.8 times, supported by strong cash flow generation.
Commenting on the Transaction, Graham Mackay, Chief Executive of SABMiller, said:
"We are excited by the enhanced prospects for growth, in a strategically important market, which the combination with Bavaria brings. We are confident that together the business will generate considerable benefits for all stakeholders.
“We are delighted to welcome the Santo Domingo Group and the management and employees of Bavaria to the SABMiller group. I believe that they will provide a significant contribution to the future success of SABMiller. Through this transaction, we will be one of the largest international investors in the Andean region, and we look forward to playing an important role in the welfare of these local communities.”
Commenting on the Transaction, Julio Mario Santo Domingo, Chairman of Bavaria said: "We are enthusiastic about joining forces with SABMiller. SABMiller has an excellent strategy and a strong management team with a demonstrated track record for creating shareholder value, through continued growth and increasing profitability in both developing and developed markets.
"The Bavaria management team and all the employees at Bavaria deserve credit and acknowledgement for their successful transformation of the company into the second largest brewer in South America.
"We are particularly proud of the fact that, for the first time, Colombian interests will have such an important role in a company of the size and magnitude of SABMiller and that SABMiller will establish their South American regional headquarters in Bogotá."
The Transaction is conditional upon the approval of SABMiller's shareholders and upon there having been no material adverse change in the businesses of Bavaria or SABMiller. A circular is expected to be posted to shareholders within three to four months and, if approved by shareholders, completion of the Transaction will follow within two business days of the Extraordinary General Meeting.
Altria, SABMiller’s largest shareholder with 24.99% of the current voting rights in SABMiller, is fully supportive of the Transaction.
Merrill Lynch is acting as financial adviser to SABMiller. JPMorgan Cazenove is acting as corporate broker and provided certain other advice to the Company. Merrill Lynch is acting as joint corporate broker to the Transaction.
Lehman Brothers, Morgan Stanley and Citigroup are acting as financial advisers to BC. Citigroup, Lehman Brothers and Morgan Stanley are acting as financial advisers to SDG.
This summary should be read in conjunction with the full text of the following announcement.
Merrill Lynch is acting for SABMiller in connection with the proposed transaction and no one else and will not be responsible to anyone other than SABMiller for providing the protections afforded to clients of Merrill Lynch nor for providing any advice in relation to the transaction.
JPMorgan Cazenove is acting for SABMiller in connection with the proposed transaction and no one else and will not be responsible to anyone other than SABMiller for providing the protections afforded to clients of JPMorgan Cazenove nor for providing any advice in relation to the transaction.
Lehman Brothers, Morgan Stanley and Citigroup are acting for BC in connection with the proposed transaction and no one else and will not be responsible to anyone other than BC for providing the protections afforded to clients of Lehman Brothers, Morgan Stanley and Citigroup, or for providing any advice in relation to the transaction. Citigroup, Lehman Brothers and Morgan Stanley are acting for SDG in connection with the proposed transaction and no one else and will not be responsible to anyone other than SDG for providing the protections afforded to clients of Citigroup, Lehman Brothers and Morgan Stanley, or for providing any advice in relation to the transaction.
This announcement is for information only and does not constitute an offer or an invitation to acquire or dispose of any securities or investment advice or an inducement to enter into investment activity. This announcement does not constitute an offer to sell or issue or the solicitation of an offer to buy or acquire SABMiller securities in any jurisdiction.
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