Last spring, Kohlberg Kravis Roberts & Co. cracked open the leveraged buyout market with a $1.8 billion deal to acquire South Korea's Oriental Brewery Co. Ltd. from Anheuser-Busch InBev NV.
Coming at a time when financial markets were moribund, the LBO was notable for being among the largest buyouts in a year that promised to make dealmaking of any size a tremendous challenge. In this case, winning the auction wasn't about the highest bid. Relying on its in-house syndication unit, KKR Capital Markets LLC, the New York buyout giant put together a debt package that helped provide the seller with certainty of closure.
As the deal was being negotiated in the months of March and April, banks were generally unwilling to make commitments. The traditional underwriting system was broken because banks had no confidence in their ability to turn around and sell the debt financing to investors.
"People were staring into the abyss," recalls a source familiar with the deal, with some going so far as to pronounce the LBO model "permanently dead."
Although KKR submitted the lowest bid of the three finalists, the firm was the only one to come up with fully committed financing. In its first attempt at arranging leveraged financing in Asia, the capital markets team, led by Aren Leekong, essentially presold the financing, doing the footwork normally executed by Wall Street firms. The KKR team approached as many as 20 banks, eventually obtaining commitments from a group of eight lending institutions.
Certainty of closure was of particular importance to the seller, the source says, because it needed to use the sale proceeds to chip away at the mound of debt it assumed in InBev SA's $52 billion purchase of Anheuser-Busch Cos. in November 2008.
Under the agreement struck in May, KKR planned to finance the roughly $1.8 billion buyout with about 45% equity, or around $800 million. But the buyout firm's strategy was to syndicate a portion of its equity commitment to keep its $4 billion Asian fund from being too heavily concentrated in a single transaction.
Shortly before the deal closed in July, KKR brought in Affinity Equity Partners, a Hong Kong buyout firm that initially placed a competing bid for Oriental Brewery. Affinity came in on the same terms as KKR, offering slightly less than $400 million for a stake of just slightly less than 50%.
Together, the financial sponsors invested around $750 million of equity, or 42% of the total.
The buyout valued Oriental at 8.5 times its Ebitda, according to the source, adding that it was levered at 5.5 times, including a turn and a half of seller financing. The lead banks -- Standard Chartered plc, Nomura Holdings Inc., J.P. Morgan Chase & Co. and HSBC Holdings plc -- provided senior debt, while Anheuser-Busch InBev kicked in $300 million of subordinated debt. In the end, the seller's financing offered "much more attractive" terms than the sponsor could have found in the open market, the source says.
Anheuser-Busch InBev, meanwhile, maintains strong ties to Oriental. For one, the Belgian beer brewer has granted KKR exclusive licenses to distribute certain brands, such as Budweiser, Bud-Ice and Hoegaarden, in South Korea. But, more interestingly, the deal was structured to give the company the right to repurchase Oriental within five years of closing. The prenegotiated terms were not disclosed, though the source suggests a "very good outcome" for KKR. If the sponsor were to instead sell to a third party, Anheuser-Busch InBev would share in the upside, provided KKR reap a gain of at least around 3 times its money.
The investors saw promise in Oriental's stable cash flow and its competitive position as a player in South Korea's beer market duopoly. In particular, the brewer is focusing on accelerating the growth of one of its primary products, Cass, the No. 1 beer in South Korea. It has begun building out its sales and marketing infrastructure, and it has installed a full-time team to assist with the company's daily operations in Seoul, the source says.
With the Oriental acquisition, KKR proved the LBO model remains
viable. It also showed that private equity was still very much in
business, if on the other side of the globe.