Vietnam M&A Case Study: ThaiBev and Sabeco (Part 2) - English Version
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The article consists of four parts as follows:
Part I: Legal Structure Analysis
Part II: Capital Structure Analysis
Part III: Valuation of Sabeco
Part IV: Exit Strategy
PART II: CAPITAL STRUCTURE ANALYSIS
As mentioned in Part I (Legal Structure Analysis), ThaiBev owned a 53.6% stake indirectly in Sabeco through two Vietnamese nominee companies, Vietnam F&B and Vietnam Beverage. This deal is the largest ever transaction in the Vietnam market, with the transaction value amounting to USD 4.8 Billion. Besides that, this transaction is also the largest acquisition in the Asia-Pacific beer market, beaten the transaction that Heineken acquired ABP (the former owner of Tiger beer) with a deal size of USD 4 Billion.
It was noticeable that the transaction was fully backed by banks, according to the announcement of ThaiBev on the Singapore Stock Exchange (SGX-ST). Specifically, five local banks entered into bilateral facility agreements as a lender and two Singapore banks entered into the syndicated facility agreement as arrangers and lenders. The intereste expense range of these loans was from 2.4% to 3% per annum.
Abstract from ThaiBev's 27 December 2017 SGX filing
The company entered into bilateral facility agreements with each of Bangkok Bank Public Company Limited ("Loan Facility 1"), Bank of Ayudhya Public Company Limited ("Loan Facility 2"), Kasikornbank Public Company Limited ("Loan Facility 3"), Krung Thai Bank Public Company Limited ("Loan Facility 4"), Siam Commercial Bank Public Company Limited ("Loan Facility 5") as a lender and Beerco entered syndicated facility agreement with Mizuho Bank Ltd and Standard Chartered Bank, Singapore Branch ("Loan Facility 6"), as arrangers and lenders, pursuant to which loan facilities ("the Loan Facility") as summarised below were provided to the Company and Beerco for the purposes of financing to the Aggregate Purchase Price and related transaction expenses.
The detailed loans to ThaiBev provided by the Thailand and Singapore banks
It was remarkable that all the loans above had a maturity of 2 years. This raised a question that how ThaiBev paid off the big loans in the very short term.
There were four possibilities as below:
ThaiBev relies upon the cash dividends received from Sabeco to service the loans?
ThaiBev, with its strong cash flow, could pay off the loans in 2 years?
ThaiBev plans to sell the Sabeco investment in 2 years?
ThaiBev refinance this transaction with the terms matching with the payback period of Sabeco investment?
ThaiBev paid VND 109,965 billion to acquire a 53.6% stake in Sabeco, the equivalent of VND 205,158 billion for the whole stake in Sabeco. According to the consolidated financial statement of Sabeco in 2017, EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) was VND 6,769 billion. As calculated in Part 3 (Valuation), the EV/EBITDA at the end of 2017 was 30 times.
In the optimistic scenario, which assumes that EBIDTA will grow at 50% per year and the dividend payout ratio will be 100% and all dividends will be paid in cash, ThaiBev will take at least 10 years to fully get back its principal investment in Sabeco. Therefore, the first possibility cannot happen.
In the second possibility, ThaiBev was downgraded by Credit Rating Agencies after the announcement of the Sabeco acquisition was made in public. Specifically, Moody downgraded ThaiBev from the rating of Baa2 to Baa3 which is the lowest ranking in the Investment Grade category of Moody. According to the short report of Moody, the Consolidated Adjusted Debt to EBITDA is expected to be 4.8X, increasing significantly from Moody's expectation of remaining below 2X.
Abstract from the short report of Moody on 02 Jan 2018
"The rating action reflects the significant increase in debt to fund a 53.59% stake in Sabeco we expect will drive ThaiBev's consolidated adjusted debt/EBITDA close to 4.8x at year-end September 2018, representing a significant shift in the company's financial risk appetite from our previous expectations of leverage remaining below 2x," says Annalisa Di Chiara, a Moody's Vice President, and Senior Credit Officer
In addition, Fitch also downgraded the rating of ThaiBev from the rating of AA (+) to AA in the Thailand market and from the rating of BBB to BBB (-) in the international market. According to Fitch's comment, the Debt to Fund From Operation ratio at the end of 2018 was expected to rise sharply from 1.2X to 5.7X, which would be in line with its BBB (-) rating, which is the lowest ranking in Investment Grade of Fitch.
Abstract from the comment of Fitch in Jan 2018
ThaiBev's ratings have been downgraded by one notch following the debt-funded acquisition of Vietnam's Saigon Beer - Alcohol - Beverage Corporation (Sabeco) on 27 December 2017. Fitch expects ThaiBev's leverage, defined as FFO adjusted net leverage, to increase to 5.7x by the end of the fiscal year to 30 September 2018 (FYE18), from 1.2x at FYE17. However, leverage should decline to around 4x by FYE20, which will be in line with its 'BBB-' rating
EBITDA and FFO are typically used to reflect the free cash flow to service loans. Using EBITDA or FFO depend on the perspective of each Credit Rating Agency, however, the Debt to EBITDA ratio and Debt to FFO ratio both reflect the ability to pay off the loan in the future. Hence, as the projection of Fitch and Moody, ThaiBev could not pay off the USD 5 billion in 2 years.
Regarding the third possibility, as mentioned in the Part 1 (Legal Structure Analysis), a 53.6% equity stake was autioned in Ho Chi Minh Stock Exchange. ThaiBev was the only one bidder joined in this auction. It showed that the bid price of Sabaceo was too high that it was not attractive to other competitors. In addition, this transaction was a strategic acquisition, not a speculative investment. Therefore, the possibility of selling Sabecon in 2 years seems difficult to occur.
As analyzed above, the first three possibilities were difficult to happen. Thus, ThaiBev had to refinance their investment that matches with the payback period. It raised a question that why ThaiBev had not made this from the outset?
According the information revealed by ThaiBev, because of the timeline of the competitive offering was extremely tight so ThaiBev got the Bridge loans with a plan to refinance the investment.
Abstract from ThaiBev's 27 December 2017 SGX filing
The timeline of the competitive offering was extremely tight, making it very difficult for bidders, including Vietnam Beverage, to secure external financing for the Acquisition.
It is shorttly after the acquisition get done in Dec 2017, ThaiBev refinanced the investment by issuing the debentures with multi-tranches. It is noted that all these debentures were arranged by the banks that provided the bridge loans.
In March 2018, ThaiBev issued debentures with an aggregate amount of bath 50 billion, equivalent to USD 1.55 billion. In this issuance, there were 5 debentures with 5 tranches. The terms varied from 2 years to 10 years, and intereste expense range was from 1.79% to 3.6% per annum. Accordingly, the weighted average term of these was 6 years.
The debentures issued by ThaiBev in March 2018
In addition, in early Sep 2018, ThaiBev continued to issue an additional debentures with total amount of bath 77 billion, in the equivalent of USD 2.39 billion. It comprised 7 debentures with 7 tranches, the intereste expense varied from 2.64% to 4.16% per annum. As calculated by the author, the average term of these debentures was 5.3 years.
The debentures issued by ThaiBev in Sep 2018
In total, ThaiBev refinanced an amount of bath 127 billion, equivalent to USD 3.96 billion with the average maturity of 5.6 years. Accordingly, the debt proportion in this transaction was 83%, it showed that this was a typical LBO transaction (Leveraged Buy-Out).
In LBO transaction, the stable and increasing free cash flow were critical to service the loans. The initial plan of ThaiBev is likely to be ruined by the unsolicited events as Vietnam Government issued the decree of 100/2019/NĐ-CP restricting to drink alcohol beverage. Besides that, the pandemic of Covid 19 has made the beer consumption weaker. This raised a question that whether ThaiBev should refinance their investment in one more time in the future?
In addition, ThaiBev acquired Sabeco at a very high price in the auction while others given up. Why was Sabeco so valuable to ThaiBev? In the part 3, all the questions will be addressed.
NOTED
1. Multi-tranche Loan: Is a loan divided into different classes of obligations, corresponding to many levels of risk to suit each investor's risk profile. This tool is quite famous, associated with the mortgage crisis (Mortgage Backed Security) in the US in 2009. At another opportunity, the author will analyze the pros and cons of this tool in practice and how the abuse of this tool has a negative effect on the world financial system.
2. The detailed covenants in indentures have been not publiced yet. In the purpose of simplifying the calculation, the author uses the method of calculating the weighted average duration period, assuming both coupon and principal are paid in one lum-sup at the maturity date of each debenture. The exact calculation of the average duration will involve calculating the Macaulay Duration of each bond based on the actual cash flow of the coupon paid out. The exact duration will be lower than the duration calculated by the author.
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Author
Huynh Nhat Trinh (M.Econ, CFA Level 3 Candidates)
Head of Investment Banking Dept, Funan Securities
More information about the author at here