A perfect brew

The win-win deal between United Breweries and Heineken opens up a window of growth opportunities for the duo.

Last Monday’s announcement by United Breweries (UBL) and Heineken NV on the resolution of long-standing disputes and extending their partnership makes it a win-win deal for both. Although finer details are yet to be worked out and will be known in a few months, the long-term gains for both companies are enormous. Among the key benefits is that the companies get access to beer markets, which should help them sustain robust growth rates in future. Meanwhile, given that UB’s stock started its up move from December 2 itself, it appears that the stock markets had sensed the deal earlier.

Opportunities galore
Czech Republic’s per capita consumption of beer at 156.9 litres annually is the largest in the world. Even in the case of countries like the US and Europe, the consumption is about 100 litres a year. China's per capita consumption is about 22 litres a year. Although India may not be strictly comparable, its current per capita consumption of about one litre a year surely means that there is huge opportunity to grow. Due to their low penetration levels, India and China are among the fastest growing beer markets in the world. India's beer market has grown at about 10 per cent in the last five years, and is likely to sustain 9-10 per cent growth over the next five years as well. This is also a reason that many international companies and brands are now looking to expand their presence in these markets.

The growing domestic beer market also augurs well for companies like UBL, which owns popular brands like Kingfisher and has a market share of over 50 per cent in India.

BEER CONSUMPTION
in litres
World (in billion)	133.0
India (in billion)	1.7
China (in billion)	30.5
China per capita	22.0
India per capita	1.0
Europe per capita	100.0

The win-win deal
On December 7, the two companies announced that they have arrived at a deal, which not only resolves some of their long standing issues, but also opens up a host of growth opportunities for the duo. The deal resolves the issue pertaining to UBL's objection of Heineken distributing two brands namely, Heineken and Tiger, in India through its JV partner Asia Pacific Breweries (APB), even as Heineken NV held a 37.5 per cent stake in UBL. Now that Heineken will buy the stake of APB Singapore in APB India and transfer the business to UBL, the issue stands resolved. The deal will also provide UBL access to APB’s manufacturing facilities in Maharashtra and Andhra Pradesh.

Post completion of the deal, UBL will have brewing and distribution rights for Heineken in India, allowing the company to capitalise on the growth opportunities in the country’s premium beer market. Since Heineken is a popular brand and among the top three companies in the world, making a visible dent in the Indian markets should not prove difficult. Heineken currently commands a mere one per cent market share in India as its products are available largely through duty-free shops. In a post-deal conference call, Vijay Mallya, chairman, UBL, exhibits confidence, “Other international brands launched by competitors haven’t succeeded (in India). But, we are confident of becoming successful due to our strong distribution and reach besides, the strong Heineken brand.”
 

LOTS OF FIZZ
in Rs crore	FY08	FY09	FY10E	FY11E
Cases (in Mln)	75.3	82.4	91.5	102.4
Sales	1561.0	1929.0	2260.0	2545.0
Net profit	54.0	46.0	95.0	120.0
EPS (Rs)	2.1	1.5	4.0	5.0
PE (x)	89.4	125.9	47.4	37.5
E: Analysts' estimates

On the other hand, UBL will get access to Heineken’s global manufacturing and distribution network which it will use for selling its Kingfisher beer in the overseas markets. Although the company already sells its beer in about 55 countries, lack of a significant distribution network has been a concern. But, with UBL now having access to Heineken’s international network, expect the company’s overseas business to grow faster.

However, for the larger benefits to accrue, analysts believe that it might take some time as the companies gradually roll out their products. For instance, the Heineken beer is expected to be launched in India in around mid-2010. Analysts also believe that even as APB's business will be shifted to UBL, the impact will not be significant given that APB has brewing capacity of only 460,000 hectolitres, which is about 7 per cent of UBL’s installed capacity. While the deal also lead to the merger of Heineken and UBL’s 50:50 JV, Millennium Alcobev Private (MAPL), analysts say that this move, too, will not have any major impact in the near term.

Outlook
UBLs move to expand its partnership with Heineken is surely positive, but expect the benefits to accrue in the long run. For now, the deal does not have any major financial implication for the company. Meanwhile, UBL has been growing faster at about 16 per cent annually, aided by the 9-10 per cent growth in domestic industry and new product launches. Among its recent product launches include Kingfisher Blue, which has been successfully introduced in select markets and pegged against international brands. The company has also launched Kingfisher Bohemia Wine. The company is further planning to roll out these brands in other major markets as well.

Overall, while the growth prospects of UBL appear good, analysts are not comfortable with the current stock valuations. The stock has run up almost 36 per cent in the last one month and at the current market price of Rs 177.50 it is trading at 37.5 times its 2010-11 estimated earnings.