Saturday, July 28, 2012

Starring: Crouching Tiger, Elephant and Giraffe

Once in a while, we have a huge corporate saga that really deserves a book. But that's gonna take years to write. So meanwhile, I write what I can. Most avid investors in Singapore would have guessed what's this about. Well, we are going to discuss F&N, APB and Tiger Beer, Thai Beverage with Chang Beer, Heineken and Kirin Holdings of Japan.

The formal introduction of the players:

Star: Heineken
Tiger: F&N and Asia Pacific Breweries
Elephant: Thai Beverage and Chang Beer
Giraffe: Kirin Holdings

The story:

Once upon a time, there was a Tiger, an Elephant, a Giraffe and a Star. The Tiger and the Star were a couple for a long time. But one fine day, the Giraffe pronounced its love for the Tiger. So did the Elephant next day! And the Star got mad!

Ok let's get serious.

In 1884, John Fraser and David Neave founded F&N. Geez, that was the era when the East India Company fought the Pirates of the Caribbean and Chinese in Singapore then had pigtails! Anyways, nothing much happen then until 1931 when F&N decided to form a JV with Heineken to make Tiger Beer. That's the beginning of Asia Pacific Breweries and over the years, Tiger grew to be the biggest brewery in this part of the world (S.E.Asia) with 120 beer brands (and we only know Tiger right?), 30 breweries in 12 countries. It usually has the No.1 or 2 position in most countries and it makes a huge amount of money for its parents.

So it's naturally that APB got listed, with 20% free float and roughly 40% stake with each of its parent: Heineken and F&N.

Meanwhile, F&N grew to become a non-alcoholic drinks maker, a publisher and a giant property developer. It's best brands are well-loved in Singapore, such as 100 Plus, Seasons Lemon Tea, Ice Mountain, Times Bookstore, Fraser Suites and Centrepoint etc. Temasek had a stake. Our banks as well.

In 2010, the giraffe from Japan came. Kirin bought over Temasek's 15% stake for SGD 1.3bn. Paid a huge price for it. Temasek was happy selling out back then. Little did they know that that stake is now worth *gasp* 2bn today! They left 700 million on the table! Ok that's not fair lah, back then it was sold at a huge premium. The Japanese like to overpay.

Kirin wanted to beef up its overseas beverage business. It had San Miguel of Philippines for beer. It had Lion Nathan in Australia for diary products. It wanted F&N to fill in the gap. But 2 years passed, nothing much was achieved. Kirin had some good products like Afternoon Tea and Fire Coffee, but it was never distributed via F&N.

Fast forward to today, the elephant charged into the room. Thai Beverage, brewer of Chang Beer and alcoholic spirites like Mekhong and Sang Som rum, stormed in and bought 22% stake from the OCBC group effectively making it the biggest shareholder of F&N. Back in Thailand, the beer market is one big Zoo with the elephant actually getting bullied by the Lion (Singha), by Tiger, even the giraffe and other smaller animals. But it has a dominant share in white and brown spirites, with some brands even having 200 year history one. That's like when Thailand was called Siam and their Kings were busy building temples to rival Angkok Wat. That's some 80 years before F&N's founding in 1884! Really once upon a time one.

Anyways, with 2 foreign entities owning 37% of the F&N, Heineken of Holland panicked. Maybe they might do something with its baby: Asia Pacific Breweries. And so the Star decided to jump in with an offer to buy out APB, the subsidiary of F&N and Heineken, at SGD 5.1bn dollars. This throws a huge spanner into the gears as F&N without APB would become a small drinks business and a property play, which both Thai Bev and Kirin wouldn't be quite interested in. So now tonnes of questions are being asked.

What will happen to our beloved Tiger Beer brand?
Will F&N breakup?
What will the elephant and giraffe do?
Did Temasek and OCBC just sold out too cheaply?
What about Chairman Lee Hsien Yang?
He just became Chairman not too long ago, if no more F&N then where can he go?
Why did Heineken pay so much? What is it that they see in Tiger?
And Jessica Alba, our Tiger Girl, will she jump ship?

So many questions! Ending the post here would be a perfect cliffhanger. But then really quite zek ark (disgusting) with not much value add to serious readers. So let me attempt some forensic analysis.

Now APB has an EBITDA of S$700m last year and probably closer to S$900m this year. Considering the synergies Heineken can extract, which should be at around 20%, we are seeing EBITDA of S$1.1bn in 1 or 2 years. Considering the growth profile of APB, it might be reasonable to pay up to 12x EBITDA for this. Well, AB Inbev, the world's largest beer co. did pay 16x for Modelo recently. So this means that Heineken will be willing to pay up to S$13.2bn for the whole APB, or S$5.3bn for F&N's 40% (APB has no debt, if it had, the calculation will need to factor that). This means that there is probably some juice left to squeeze out of Heineken, if Chairman Lee Hsien Yang agrees with the math and leads the board to arm-twist Heineken. But not much more, remember the first offer is already S$5.1bn.

Meanwhile, Heineken blinked and extended the deadline, which was supposed to be yesterday (27 July Fri).

What about the elephant and the giraffe? Well they can't complain much since they benefitted with Heineken doing this stunt and F&N just went through the roof from recent $6+ to now closer to $9. Meanwhile, it might not be unthinkable that either of them, or both of them are scrambling to buy more F&N in the open market to get to 30% stake or more such that they have a bigger say in the eventual breakup. Which explains F&N going from strength to strength.

Now, Kirin is very interested in the drinks business and the Japanese has a history of really overpaying, especially so with the current strong yen. It might bid high for the drinks part. So will Chang Beer say OK to a good price? But then they will be left holding with a property business and cash that was sput out along the way. How does that tie in with their Thailand business? Hmmm, these are questions for Part 2, more thinking is needed.

But what's the real strategy to make money here? Sadly, there isn't any great ones. Things are playing out too fast. APB is ABOVE Heineken's offer price which means the market is saying F&N will ask for more. And F&N itself is all time high driven by more buying in anticipation of more bids for its other businesses. Chang Beer didn't really do anything after the news broke but it did rally beforehand. And so did Heineken. Meanwhile Kirin is stuck in submerging Japan, so not so interesting.

Maybe the moral of the story here is to keep looking at consumer staples names. Over the long run, they have proven to be great investments most of the time. The first ever stock discussion on this blog: Colgate, is up a crazy 60% including dividends in less than 2 years!

We shall discuss the other questions and further updates as the saga unfolds.


  1. Nice story. I enjoy it a lot.

    Congratulations on your bet on CL. I like your article on CL as well. A number of consumer staples have been on a tear since 2010.

    I considered CL in 2010 when its stock was somewhat depressed to its earnings potential when the Venezuela devaluation hits the stock. But I invested in Coke instead. Both produced good returns in the period of time.

    Most of the increase in valuation is derived from an expansion in earning multiples than from the growth in actual earnings, including Coke and CL. I rather it comes from growth in underlying earnings than expansion in multiples. But I will still take it.

    In 2010, both KO & CL were selling for about 17x of the previous FY adjusted eps. Today, both are about 21x of last year adjusted eps. However, the stock price are up much more than what the earnings growth were for the period. From FY2009 to FY2011, KO & CL eps grew 25% and 15%, respectively. But the stock price for KO & CL grew by 55% and 45% , respectively, from the low prices of the stocks in 2010. So there is sort of a diversion in how the market value CL, KO or most of the other consumer staples then and now.

    If the market today values the stock the same as in 2010, KO would be selling for $65 while CL for $86. But it isn't. So we can conclude that most of the return can be attributed to expansion in multiples.

    For KO (based on $52 cost), $13 of the return is due to growth in earnings while $16 is due to expansion in multiples.

    For CL (based on $75 cost), $11 of the return since 2010 can be attributed to growth in earnings and the rest of $22 due to expansion in multiples.

    Have you considered any other consumer staples too? In fact, some of the Singapore consumer staples have also been on a tear, especially since last year. Like ThaiBev, Viz Branz and Super Group. All have been on a tear.

  2. Really interesting history, thanks Brian!