FUNDS: CVC downs beer in emerging Europe

By bne IntelliNews November 17, 2009

Robert Smyth in Hungary -

CVC Capital Partners' acquisition of Anheuser-Busch InBev's emerging European operations is its first in the region, but a huge one. And now the global private equity firm says it's looking for further investments in Central and Eastern Europe, viewing the economic crisis as only having put a temporary dampener on the economic prospects there.

CVC, which owns some 51 companies worldwide with annual sales of approximately €88bn, announced October 15 that it's agreed to pay about $2.23bn for the Central European operations of AB InBev, in a deal expected to close in January. The deal also involves a possible future payment to AB InBev estimated to be as much as $800m that is contingent on CVC's return on its initial investment. This would see AB InBev receiving a share of CVC's future revenues from its former breweries should certain thresholds be exceeded. Market conditions are one of many factors that will impact CVC's future returns.

Under the terms of the deal, funds advised by CVC have agreed to acquire AB InBev's operations in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia. The brewery group is to be renamed StarBev. "Among the key attractions of the AB Inbev's [Central and Eastern European] business are its fantastic portfolio of brands, leading positions in fundamentally attractive markets, and strong local management," Istvan Szoke, senior managing director and head of CEE at CVC Capital Partners, tells bne.

CVC appears to be set to following an "if it ain't broke don't fix it" approach to the core of the business. "We are acquiring a business that already has a very good structure and model. We plan to build on the good foundations already in place," says Szoke.

Management and employees can also breathe a sigh of relief, since Szoke and his team view the organisation as already lean and very well managed. "We do not see the need for any significant changes."

Furthermore, CVC plans to support the existing brands, which Szoke describes as one of the key attractions of the business. "The icons of the portfolio are regional brands such as Staropramen and national brands such as Borsodi in Hungary, Apatinsko Pivo in Serbia and Bergenbier in Romania," he explains. CVC will also brew and/or distribute Stella Artois, Beck's, Lowenbrau, Hoegaarden, Spaten and Leffe in CEE under license from AB InBev.

While beer has typically been the realm of strategic investors snapping each other up, with AB InBev itself created by the merger of Interbrew and AmBev, Szoke argues that CVC's long experience of investing in consumer businesses around the world should stand it in good stead, adding that it's not the first time CVC has invested in alcoholic beverages.


CVC sees no long-term decline in beer consumption despite the rising popularity of wine across the region, and reckons beer consumption will rise further, especially once the recession has passed. "We believe that per-capita beer consumption in CEE has room to increase further. While the economic crisis has led to lower beer consumption overall in CEE, this is likely a short-term phenomenon. In the medium term, we expect growth to resume in all CEE beer markets."

On the question of which markets CVC is seeking leadership in, Szoke notes that the AB InBev business is already the market leader or number two or three in all markets. "CVC's longer-term plans include investing in the group to develop it into a regional champion," he says.

The transaction is expected to close by January 2010 after regulatory clearance. Carlos Brito, CEO of AB InBev, said the transaction enables his drinks company to exceed its stated commitment to achieve $7bn in divestitures and focus its resources on core markets. In addition, AB InBev will retain the right of first refusal to reacquire the business should CVC decide to sell in the future.

As part of the transaction, CVC raised approximately $1bn of senior debt from a group of international and regional banks. Freshfields acted as legal counsel to CVC. The $2.231bn purchase price is comprised of: $1.618bn in cash; $448m in deferred payments; and $165m in minority interests. CVC is currently investing from the CVC Fund V, CVC Tandem Fund and CVC Asia III, with an aggregate of approximately €18bn in equity capital.

Regarding the length of time that CVC intends to own the brewery assets, Szoke simply observes that, "CVC focuses on building businesses over the long term, typically holding investments for five years or more. It is much too early to talk about an exit."

In the meantime, though, CVC is scouring the region for other good investment opportunities. "We are interested in all sectors where we find good investment opportunities," said Szoke. "We think there are interesting opportunities to acquire good-value companies all across the region. In the medium and longer term, we believe that the region's growth potential and prospects remain strong despite the current challenges."

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