Asahi Acquires Carlton United Breweries

In this article we’re going to take a look at Asahi’s $16 billion acquisition of Carlton United Breweries (CUB), Australian brewing giant that held almost 50% of the Australian beer market.

TLDR

• Company Overview: The most prominent Australian beer brewery.

• Deal Strategy: Build The Moat through owning distribution.

• Deal Execution: Potentially overpriced but already showing upside.

Company Overview

The Business Model

The CUB business model focused on brewing, marketing, and distributing a wide range of beer brands. They have an extremely strong grip on the Australian beer market due to the economies of scale required to have competitive pricing and the tight distribution model for pubs and clubs.

They have two core revenue streams:

1. Sales at retail shops like Dan Murphys and BWS,

2. Sales at pubs and clubs

CUB sets up contracts with pubs and clubs where they provide significant rebates on their beer kegs in exchange for exclusive rights to supply the beer for certain taps. In most pubs, around 80% of beer taps will run either be CUB or Lion products, with the remaining taps termed ‘rotational taps’, where they can serve any beers.

Instead of spending time and money developing a new beer with the hopes it would be a hit, their strategy for growth was to acquire smaller breweries that already showed signs of success. They would then use the access to more taps to increase the sales and the economies of scales to drive down the costs.

The Competitive Landscape

There really is only one other competitor in the Australian market, Lion, which is owned by Kirin. Between these two companies, they represent over 80% of the market with 404 breweries making up the final 20%.

As mentioned, this is due to the economies of scale required to bring the cost of production down to a competitive level and the tight distribution model.

These two companies have the taps locked up so tightly that even brewers of Coopers’ size, lack the market power or resources to compete aggressively. Outside South Australia, CUB and Lion have a tendency to specifically exclude Cooper’s or its products in their contracts with publicans. So, to drink Coopers, you need to forego a schooner and buy a bottle - it’s a big ask.

Deal Strategy: Build The Moat

The Asahi beer business in Australia was making some inroads with Asahi and Peroni, along with acquisitions of Australian brewers Mountain Goat and Cricketers Arms, but they only had 1.2% of the market.

The strategy with CUB was clear: build the moat through owning distribution.

The contracts CUB and Lion have with publicans are between 5-10 years, so opportunities to win these contracts are few and far between. On top of this, keg rebates have also transitioned from simple discounts off keg prices to now include significant upfront payments.

Asahi could either wait it out for these contracts to finish and then throw huge sums of cash at publicans, or they could acquire CUB. The choice was clear.

Deal Execution

The deal was done at $16 billion, all in cash, with Asahi financing it through debt. The market didn’t respond too well to the deal, noting it was a high price at a 14.9x earnings multiple and that Asahi’s debt-to-EBITDA ratio was becoming a concern.

However, the share price bounced back as details of the strategic benefits and expected synergies were communicated.

Owning distribution has clearly been successful in driving up Asahi sales. If you’re a beer drinker and have been for some time, you’ll have noticed that Asahi is increasingly becoming available on taps. Instead of having to compete with all 404 independent breweries for the one or two rotational taps in pubs, Asahi beer is now only competing against other Asahi-owned brands for all the other taps.

Even when they don’t win, they win.

It’ll be interesting to see how the competition between Asahi and Kirin plays out, but one thing is for sure - the beer landscape in Australia now has even more of a Japanese flavor.