Heineken Should Stay Firm on Tiger

Source: WSJ

By RENÉE SCHULTES

Aug 14th

Heineken's HEIA.AE +0.22% dilemma is no small beer. The Dutch beer group has offered S$7.5 billion ($6 billion) to buy the remaining 58.1% of Tiger beer brewer Asia Pacific Breweries that it doesn't already own. But it faces a challenge from Thai Bev, which has been steadily building its stake in APB shareholder Fraser & Neave. In addition, Kindest Place, a company related to Thai Bev, has offered 10% more for the 7.3% of APB shares directly held by F&N. Heineken has until Aug. 24 to decide whether to trump the Thai offer.

Heinekin's offer would allow F&N to exit the beer business.

So far, Heineken has been playing it cool, insisting the ball is in F&N's court. It has a strong hand: Heineken is proposing to buy both F&N's direct stake plus its 50% stake in the holding company through which the two groups jointly own 64.8% of APB. The deal, worth S$5.3 billion to F&N, would give the Singaporean conglomerate a clean exit from the beer business, which accounts for a third of operating profit. If F&N accepts Kindest Place's offer, it will receive only S$1 billion in cash and risks being stuck with an indirect stake that it can't sell without Heineken's permission.

Even so, Heineken may be reluctant to leave anything to chance. Securing full ownership of APB is a major strategic goal. If the Thai offer wins, Kindest Place's direct stake will increase to 15.9%, denying Heineken the 90% it needs to squeeze out minority shareholders and leaving APB listed on the stock exchange. It could be tempted to offer F&N a sweetener to clinch the deal.

But would a sweetener make any difference? Heineken's S$50 a share offer is hardly stingy, valuing APB at 16.8 times historic earnings before interest, taxes, depreciation and amortization and a 44% premium to the undisturbed share price, notes Sanford C. Bernstein. Heineken has already secured an F&N board recommendation and although Thai Bev has been building a stake in F&N, its 26.2% isn't enough alone to block the deal in a shareholder vote.

The Thais may be counting on the support of Japanese brewer Kirin, which owns 14.7% of F&N. If so, a few extra dollars is unlikely to be decisive. Heineken is right to stand firm.