Heineken NV (Amsterdam: HEIA), the third-largest brewery by sales, is frothy on Asia after fully acquiring Asia Pacific Breweries Ltd. (Singapore: A46), maker of Tiger beer, but its new debt could shrink growth elsewhere.
Amsterdam-based Heneiken expects Asia to represent 15 percent of its profits after shareholders approved on Friday a 5.6 billion Singapore dollars ($4.6 billion) takeover of Asia Pacfic Breweries, the top Southeast Asia brewer. Heneiken will buy out longtime partner Fraser & Neave Ltd. (FNH). Heneiken and Fraser & Neave previously jointly owned Asia Pacific since 1931, but Heneiken was prompted to take over APB after rival Thai Beverage Plc (THBEV) bought stakes in both Fraser & Neave and Asia Pacific.
"This transaction will further increase Heineken's financial and geographic exposure to emerging markets and strengthen our competitive position in one of the most exciting regions in the world," said Jean-François van Boxmeer, CEO of Heneiken, in a statement. "Our regional headquarters will remain in Singapore with the Heineken and Tiger brands at the heart of our portfolio. We are now ideally positioned to expand our presence across the region and create long-term financial and strategic value for our shareholders."
Heneiken values Asia Pacific at 35 times trailing earnings. Despite the high cost, analysts said the deal made sense.
"From a strategic perspective, the APB deal makes sense," wrote Thomas Mullarkey, an analyst with Morningstar, in a Friday research note. Most of its markets have ample runway to increase beer volume for years to come as their populations grow and per capita consumption levels climb.
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However, the deal will raise Heneiken's debt ratio to 3.3, more than its target 2.5, according to the Wall Street Journal. This will limit the company's ability to acquire companies in other areas, including the surging Brazil market. Heneiken hopes to bring its debt down through repayments and cash generation within two years, according to the Journal, so its lost deals will depend largely on the cycle of mergers.
Shares of Heneiken were up 0.86 percent to 46.39 euros at Friday's close.