KKR Displaces Lenders in AB InBev’s Oriental Brewery Buyout

 KKR & Co.’s $1.8 billion purchase of Oriental Brewery Co., at the time the biggest leveraged buyout in more than nine months, shows how private equity firms can replace banks in offering liquidity to cash-starved companies.

The New York-based firm’s agreement last month to acquire South Korea’s second-biggest brewer from Anheuser-Busch InBev NV allows AB InBev to repurchase the company in five years at predetermined conditions, the beermaker said. The technique may be repeated by companies wanting to raise cash from assets they’re reluctant to sell, industry executives said.

“Private equity firms can be providers of short-term cash in a world of scarce bank credit,” said Gonzague de Blignieres, co-head of Barclays Private Equity in Paris. “Anheuser raised money on its Korean asset to pay down debt and hopes it’ll be able to buy it back when the economic environment improves. We’re going to see more of that.”

LBO firms such as KKR and New York-based Blackstone Group LP are struggling to invest the $507 billion of cash they have available after the bank financing they use for acquisitions evaporated in the credit crisis, according to Preqin Ltd., a London-based consulting firm.

The buyback option was attractive for AB InBev, which didn’t want to part with the asset, Nathaniel Zilkha, a KKR executive involved with the transaction, said in a telephone interview from Seoul.

“The deal provided them with liquidity,” he said. “The certainty on the bank financing also helped us make the difference.”

Selling Assets

AB InBev, the maker of Stella Artois and Budweiser, wants to sell $7 billion in assets to trim $45 billion of debt taken on in last year’s $52 billion purchase of St. Louis-based Anheuser Busch, the company said in March. KKR and rival firms TPG Capital in Forth Worth, Texas, and London-based CVC Capital Partners Ltd. expressed interest in the brewer’s operations in eastern Europe, valued at up to $3.4 billion, people close to the talks said June 16.

“The big private equity firms raised large amounts of money, and they need to think about more creative ways to invest their committed capital,” said Fotis Hasiotis, the London-based head of a team at Bank of America Corp. that advises private equity firms in Europe. “This transaction works as a model.”

To be sure, companies in need of cash will choose to sell shares or bonds before disposing of assets as the worst global recession since World War II hits valuations, said Laurent Baril, a Rothschild banker who specializes in leveraged buyouts in Paris. “Getting bank loans was also critical to the Oriental deal,” Baril said.

‘Good Price’

KKR agreed to purchase Seoul-based Oriental Brewery for about eight to nine times earnings before interest, tax, depreciation and amortization, people familiar with the acquisition said. That’s “a very good price” for AB InBev, Gerard Rijk, an analyst at ING in Amsterdam, said when the deal was announced on May 7.

AB InBev, based in Leuven, Belgium, said it may keep a stake in Oriental Brewery through an earn-out agreement. It can buy back the unit for 11 times Ebitda in five years, said the people, who declined to be identified because the details are private.

“A contractual double-digit exit multiple is attractive for a sponsor in the context of today’s market,” Hasiotis said.

Marianne Amssoms, a spokeswoman for AB InBev, the world’s biggest beermaker, declined to comment on terms.

KKR’s Stake

KKR will finance about half of the transaction with cash from its funds, KKR’s Asia head Joseph Y. Bae said on May 7. The buyout firm’s “large” equity commitment and the “high quality asset” helped secure more than half of the debt financing before signing the deal, Zilkha said.

“The Oriental deal doesn’t necessarily mean the market is reopening for buyouts, but it shows that with the right asset, the right buyer, a fairly priced deal and some creativity on structuring, there’s debt available,” he said.

KKR will use loans, including $300 million provided by the seller, to make up about 60 percent of the purchase price. In the boom years, debt could total as much as 75 percent, Barclays’s Blignieres said. There were fewer forced sellers, reducing the use of buyback options, which cap buyout firms’ returns, he said.

“We’re holding that kind of talks with industrial companies again,” Blignieres said. “Private equity firms and industrial companies can be close allies in difficult times.”

Fewer Transactions

KKR, which reported a $1.2 billion loss for 2008, the firm’s first in at least five years, said it has $15.3 billion of cash available to invest. The pace of LBOs slumped by 75 percent after the bankruptcy of New York-based Lehman Brothers Holdings Inc. in September, data compiled by Bloomberg show. Platinum Equity LLC’s purchase of most of Delphi Corp.’s assets outside of the U.S. in June, worth about $3.6 billion, surpassed the Oriental takeover as the biggest LBO since Lehman.

“There’s a big reserve of industrial companies seeking to reduce debt, and therefore a potential for that kind of deal,” Rothschild’s Baril said. “But private equity firms will themselves have to overcome the hurdle of raising bank debt.”