South Korean retail giant Lotte Group is ready to return to the fray and raise its initial offer for Oriental Brewery, which its owner Anheuser-Busch InBev (INTB.BR: Quote, Profile, Research, Stock Buzz) values at more than $2 billion, in a new round of bidding due next week, sources said.

Lotte was originally seen as a top contender to buy the South Korean beer business, but its first offer was rejected, sources familiar with the matter said on Wednsday, leaving its role in the auction in doubt.

Beer would complete Lotte's product line-up, which includes popular local liquor soju and whisky. OB would give the buyer a 40 percent share of a major beer market. No.1 brewer Hite (103150.KS: Quote, Profile, Research, Stock Buzz) has 60 percent of the market share.

The sources, who did not want to be named because they were not authorized to speak on the record about the issue, declined to say how much Lotte had bid initially or by how much it would increase its offer.

Private equity firms Affinity Equity Partners, Kohlberg Kravis Roberts & Co KKR.UL and MBK Partners are also preparing offers for the auction's second round, the sources said.

London-listed SABMiller (SAB.L: Quote, Profile, Research, Stock Buzz), the world's second-largest brewer after AB InBev, also remains in the process, sources said, though it was unclear whether it would submit a second round bid.

Ji Ki-chang, an analyst at Tong Yang Securities in Seoul, said Lotte's initial bid was probably an attempt to buy the company as cheaply as possible.

If OB is sold at 2 trillion won ($1.46 billion) it will be cheap, he said, adding that 2.5-3 trillion won would be a reasonable price based on OB's business results, without consideration of foreign exchange rates.

Sources say OB's earnings before interest, tax, depreciation and amortization (EBITDA), measure of cash flow, is around $175 million.

Given the difficult global lending environment, sources note that a private equity bidder will be hard pressed to submit an offer much above $1 billion. AB InBev has signaled it will not consider offers in the low $1 billion range.

Like any auction, bidders may emerge or drop out, or the process could be scrapped, as AB InBev has signaled it's in no rush to sell Oriental Brewery.

But the company is committed to selling non-core assets and has a $7 billion loan due in November, part of the $45 billion in borrowing InBev took out last year to buy U.S. brewer Anheuser-Busch for $52 billion.

AB InBev aims to sell OB for more than $2 billion. JPMorgan and Deutsche Bank are running the sale. Lotte Group is seen by analysts and bankers as a top choice to not only buy the business, but to pay what InBev wants.

South Korea's economic climate and currency have picked up in recent weeks, an added boost to the OB sale after it started in the thick of a sharp downturn.

ROUND TWO

One source close to the matter said that if Lotte fails to buy OB, it may pursue a beer license and brewery on its own. That could be damaging to a private equity owner of OB, as private equity relies heavily on financial models and cash flow predictions when financing a deal.

Building a brewery business from scratch and getting government approvals would take time, however.

It looks like there is almost zero possibility for Lotte to start a third beer brand, considering that the beer industry requires huge investments and marketing costs to penetrate the market dominated by Hite and OB, Ji said.

Merrill Lynch is advising Lotte, Citigroup is advising Affinity, Goldman Sachs is advising KKR and Morgan Stanley is advising MBK, according to the sources.

The banks and firms either declined to comment or could not immediately be reached.

($1=1373.1 won)

(Additional reporting by Yeon-hee Kim in SEOUL; Editing by Jonathan Hopfner & Dhara Ranasinghe)