Brewing deal marks dawning of new PE era

October 15, 2009

Rumours of the demise of the mega buyout would appear to have been exaggerated. CVC’s $2.23 billion purchase of Anheuser-Busch InBev’s breweries in nine eastern European countries is the latest multi-billion dollar private equity deal to roll off the production line. It follows Blackstone’s bid for ABInBev’s U.S. theme parks and a deal involving CVC for British bus and train group National Express.

But while big is back, the ABInBev deal is somewhat different from the buyouts that were done during the boom era.

First, leverage levels are reduced. CVC has cobbled together senior debt financing of $1 billion from a group of banks to help fund the deal. Throw in $448 million of vendor financing and some 65 percent of the purchase price (which includes $165 million in minority interests) is in the form of debt. This compares with the peak, when some deals were 80 percent debt funded.

Second, it clearly wasn’t easy even to get to this level of leverage. CVC had to get a third of its debt funding from the vendor instead of bond or mezzanine investors. This is not inexpensive money. CVC has a strong incentive to pay this “unsecured debt obligation” off quickly since it pays interest of between 8 and 15 percent.

 On top, ABInBev is getting a profit share — which could be as much as $800 million — depending on the investment return that CVC achieves. And last but not least, ABInBev has negotiated a deal which gives it the right of first refusal on buying the assets back should CVC decide to sell. All in all, hardly the sort of loosey-goosey capital structure you might have seen a couple of years ago.

Third, and unsurprisingly given the cost of this little lot, there’s no evidence that private equity is again in a position to compete with trade buyers for assets. The main reason the deal fell to a buyout firm was that private equity got a near free run at the ABInBev brewery portfolio. This is because it was located in markets where other international brewers would have run into anti-trust problems and the domestic bidders would have been even more constrained in terms of funding.

No wonder a long list of private equity firms  put in bids, including Cinven, Warburg Pincus, TPG and KKR.

There will be more opportunities of this sort for private equity firms as companies that overextended themselves during the boom dispose of assets. Many buyout firms still have significant firepower, having raised a lot of money during the boom that they have not yet spent. This makes it possible for them to do quite big deals, even when there is a requirement for a much fatter equity cheque to be written.

But given the constraints on funding, private equity will continue to struggle to be competitive with trade buyers. That means opportunities are most likely to arise in situations where companies are selling off divisions or units and wish to avoid disposing to a competitor, or where anti-trust issues might impede a trade sale. In this respect, the private equity future may look rather more like the industry in the 1980s and 1990s than how it looked during the past few years of frenetic boom.

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