January 12, 2009 / 7:28 AM / 10 years ago

DEALTALK-Lots of Lotte interest in S. Korea brewer OB

HONG KONG/SEOUL, Jan 12 (Reuters) - South Korean retail giant Lotte Group, fresh from a deal to buy a local liquor business, is looking to gulp down another beverage group within its borders.

After a tough start, the auction of South Korean beermaker Oriental Brewery (OB) is about to begin, and Lotte is gearing up to bid, sources with direct knowledge of the matter say.

OB, South Korea’s second largest beer maker, could fetch around 1.5 trillion won ($2 billion).

While Lotte has long been viewed as a likely suitor for OB, it’s in an even better position now, analysts and bankers say. In addition to its recent efforts to expand the company’s drinks business, Lotte has lots of cash on hand.

“It is Lotte only that can afford that amount of money in the current economic climate,” said Jin Yoo of Goodmorning Shinhan Securities. Lotte Group has 3 trillion to 4 trillion won in free cash, including proceeds from the 2006 IPO of Lotte Shopping (023530.KS), the analyst said.

Yoo said that given Lotte’s existing grip on the lower-margin soft drinks business, entering a higher-margin segment with beer and soju liquor makes sense.

Nailing down an exact price for OB will not be easy. Anheuser-Busch InBev INTB.BR, the world’s largest brewer, owns a majority stake in OB but the company is unlisted.

One way to value it is by looking at Hite Brewery 103150.KS, South Korea’s No.1 beer maker. Hite is valued at 11.5 times forecast earnings, according to Thomson Reuters data.

Applying the same multiple to OB’s 2007 earnings, OB would be worth around 1.33 trillion won. One of the sources said that OB’s earnings before interest, taxes, depreciation and amortisation —a measure of cash flow known as EBITDA —is around $230 million.

Because of Hite and OB’s dominant market share in Korea — 60 percent and 40 percent among local producers — Hite would not be able to bid for OB.

OB declined to comment.

Reuters reported in September that Belgian brewer InBev NV planned to put OB up for sale in an effort to shed a noncore asset and raise cash for its $52 billion purchase of U.S. brewer Anheuser-Busch Cos Inc.

But the global financial markets plunged in the ensuing months, forcing InBev to shelve the process. With market conditions now moderately improved, some investors willing to take on a bit more risk and the South Korean currency rising from historic lows, the OB auction is ready to begin, sources say.

Deutsche Bank (DBKGn.DE) and J.P.Morgan (JPM.N), the banks that advised InBev on the Anheuser-Busch deal, will run the OB auction. The banks did not immediately return messages for comment.

When news of the auction first broke, Japanese brewers Kirin Holdings Co Ltd (2503.T) and Asahi Breweries Ltd (2502.T) were said to be among the interested parties.

Now the focus has turned more to Lotte, a retail behemoth that has been building up its beverage business.

Lotte is not commenting on OB, saying it is not aware of the auction, but sources say the company is getting ready to pounce.

Sources did not want to be quoted because of the sensitive stage of the process.

Earlier this month, Lotte said it would acquire Doosan Corp’s (000150.KS) spirits-making division for 503 billion won ($386 million). Lotte Chilsung Beverage (005300.KS), the country’s top soft drinks brand, was picked late last month as the preferred buyer for the maker of South Korea’s traditional spirit, soju, beating four other suitors.

Lotte has not been shy in its drinks expansion. The company struck an agreement with Asahi in 2004 to establish Lotte Asahi Liquor Co. The following year it again teamed up with Asahi, this time to submit a joint bid for South Korean liquor producer Jinro Co. Hite won the auction.

Lotte is the South Korean importer of Japan’s Asahi Beer, which is now one of the country’s most popular foreign beer thanks to Lotte’s sales networks. Lotte also produces low-priced wine.

While an OB auction is likely to produce a host of other potential buyers, it may be tough to compete against Lotte’s thirst.

Editing by Kim Coghill

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