Monday, April 27, 2009

Kirin bid for Lion Nathan undervalues brewer

So Kirin is making an offer for the rest of Lion Nathan Ltd PDF [LNN.NZ] that they don't already own. They are offering A $12.22 per share therefore valuing the company at about $A6.5 billion.

 The LNN board is recommending the offer but are shareholders getting a fair deal?

 Lets do a comparison of the recent buyout last year of Anheuser Busch by InBev. In that deal InBev bought its target for close to US $50 billion with valued the company at approx 15X EBITDA according to website Blogging Stocks.

 The Kirin/Lion deal values Lion at 12.5 X EBITDA according to Michael Feller from the Business Spectator

 "The price Kirin is offering effectively values Lion at $6.5 billion on an equity basis and $8.2 billion on enterprise value, as well as an FY09 consensus forecast EBITDA multiple around 12.5 times".

 The EBITDA comparison then between the two deals shows an enormous gap in the prices paid for the two targets, with Kirin shelling out 20% less to take control of Lion than what InBev paid for Anheuser Busch last year.

 If a comparable 15 X EBITDA figure was offered by Kirin then the per share price should be closer to $14.66 per share.

 Figures aside the iconic status of both target brewers is very strong and there should be a premium for that.

 Also the tough economic times we are currently facing show fully the benefits and therefore the value of having brewing assets-they do well during booms and better in recessions!

 The long-term benefits of good brands must also be accounted for in this takeover price.

 Clearly then, Lion shareholders are being seriously under represented by Lion Nathan management as they have agreed the price to be paid is sufficient and another higher offer must be made for control of the company.

 Lets hope the independent report into the offer turns out to be a definite no at the current Kirin offer price.

 Shareholders should reject the bid.
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