Heineken NV, the world's third-largest brewer, agreed to buy Austria's biggest beer company for 1.9 billion euros (US$2.1 billion) in cash and assumed debt to become the No. 1 brewer in central Europe.
The purchase of BBAG and its Brau Union subsidiary will allow the Dutch company to leapfrog SABMiller Plc, which currently dominates the beer market in countries such as Hungary and Poland.
It's the biggest acquisition in Heineken's 130-year history.
Heineken chairman Anthony Ruys is betting that beer consumption in central Europe will continue to rise faster than in the EU, where demand has slowed in recent years. The Dutch maker of Amstel lager and Murphy's Irish stout is vying with SAB and Interbrew SA to increase its presence in the area.
The region "is the last crown jewel in Europe" for Heineken, said Gerard Rijk, an analyst at ING Barings who recommends investors buy the Dutch company's stock.
"It's a perfect fit because BBAG is important in markets where Heineken has little market share, such as Hungary," he said.
Heineken will pay 11.40 euros a share to family and other investors with about 69 percent of the Austrian company, whose full name is Oesterreichische Brau-Beteiligungs AG.
Once that stake is acquired, Heineken will offer minority BBAG shareholders 124 euros a share and Brau Union investors 127.27 euros a share, the company said in a Business Wire statement.
The Czechs drink the most beer per capita in the world. Beer consumption in central Europe will probably grow 3 percent annually over the next five years, compared with 2 percent for the rest of the world, according to Heineken's estimates. Beer drinking in the region has risen more than 60 percent since 1998.
"Heineken has to have acquisitions to keep double-digit earnings growth and where better to grow than in East European countries, which have heavy drinking populations," said Edwin Slaghekke, who helps manage about 2 billion euros, including Heineken shares, at Theodoor Gilissen Bankiers NV.
The Amsterdam-based brewer will finance the acquisition with debt.
"I rule out the option of share issues for this deal," Ruys told reporters in Vienna.
He declined to give details on how the purchase will be financed through debt, and said Heineken doesn't expect to make a first payment until October.
The purchase will make Heineken the biggest beermaker in Austria, Poland, Hungary, Romania, Bulgaria, Slovakia, Macedonia and Albania and No. 2 in Croatia.
Heineken is paying 10.2 times BBAG's earnings last year before interest, taxes, depreciation and amortization. The Dutch company estimates it will save about 40 million euros a year by 2007.
"We are always conservative" when giving such estimates, Ruys said.
The brewer spent 1.2 billion euros last year on buying smaller rivals. It bought a controlling stake in Croatian brewer Karlovacka Pivovara, gained a controlling stake in Kazakhstan's Dinal LLP brewery and purchased Russian brewer Bravo International.
BBAG has a 14 percent share of the central European beer market, owns five breweries there and sells brands such as Starobrno and Edelweiss in five of the central European 10 countries set to join the EU next year.
BBAG posted a 16 percent increase in operating profit to 79.5 million euros for last year, on sales of 1.1 billion euros, the Austrian company said today.
Credit Suisse First Boston managed Heineken's offer, while J.P. Morgan advised BBAG.
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