Vietnam Beer War Could Give Japanese Brewers a Hangover

(Bloomberg Gadfly) -- Japan's restless brewers suffered some brutal hangovers from their first big emerging-market forays. What are the odds another binge will turn out any better?

Kirin Holdings Co. is in talks with Heineken NV over a possible sale of its Brazilian operations, the company said Friday, two days after Bloomberg News reported that Asahi Group Holdings was considering selling its stake in Tsingtao Brewery Co. 

There's an obvious use for this cash out there in the form of Saigon Beer Alcohol Beverage Corp., the state-controlled Vietnamese brewer which listed on that country's exchange last month. Both Japanese companies, along with Anheuser-Busch InBev NV and Heineken NV, have registered with the government to bid for a stake.

Gadfly has previously argued that Asahi in particular could benefit from owning a slice of Sabeco, as the Vietnamese company is known -- but in the cold light of post-IPO day it's looking markedly less attractive. The shares are up about 70 percent over the past seven weeks, meaning the government's 90 percent stake is worth more than three times the $1.8 billion officials were talking about three months ago.

With a forward price-earnings valuation of 38 times, that would make it the fourth-most richly valued brewer globally, and the priciest among those with market values above $5 billion.

That's not necessarily as much of an argument against Sabeco as it may look. If a brand is good enough and management are skilled enough at exploiting it, long-term investors would be crazy to turn down an investment on the basis of a few points on the P/E ratio. 

But escaping the tyranny of valuation requires real flair in increasing revenue and margins by more than expectations -- and in an industry that's been shaped over the past few decades by the bold cross-border dealmaking of executives such as Carlos Brito and the late Graham Mackay, Japan's international forays have been notably flat-footed. 

Take Kirin's investment in Schincariol, Brazil's equal-third largest brewer. Since the acquisition in 2011 the Brazilian unit has lost about 1 billion reais ($312 million) in operating income, helping push the Japanese company to its first annual loss in 66 years. Having paid about $3.9 billion, Kirin could let the unit go for about $870 million if it goes ahead with a sale, the Nikkei newspaper reported Friday.

On the face of it, Asahi has done better out of Tsingtao. After paying about HK$5.17 billion ($667 million) to buy a 19.9 percent stake from AB InBev in 2009, its holding is now worth about HK$8 billion at current market prices, according to data compiled by Bloomberg. Still, Tsingtao's best years -- and those of the Chinese beer business as a whole -- appear to be firmly in the past, with trailing 12-month net income peaking way back in 2013.

The flawed approach to dealmaking doesn't appear to have stopped with Schincariol and Tsingtao. In Asahi's most recent deal, a 7.3 billion euro ($7.8 billion) bid for SABMiller Plc's eastern and central European assets, it ended up paying 800 million euros more than the next-highest offer, people familiar with the matter told Bloomberg News.

The current transaction has qualities that make it stand apart from those previous deals: Vietnam is Asia's third-biggest beer producer after China and Japan, with a working-age population that will overtake Japan's by 2030, and Sabeco has almost half the market. Still, there are clouds on the horizon.

Heineken and Carlsberg A/S are already significant players in Vietnam, according to Euromonitor data quoted by Saigon Securities Inc., so Sabeco's new owners will face stiff competition. To make matters worse, the government is planning to raise a sales tax on beer from the current rate of 55 percent to 65 percent in 2018, which should squeeze margins.

If Japan's brewers can get a stake in the business at a reasonable price, they should take it. But unless the government agrees to sell for less than the market value, that's looking increasingly unlikely. Sabeco is a good business, but not at any price.

Sometimes, the best investments are the ones you don't make.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

To contact the author of this story: David Fickling in Sydney at dfickling@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.