OCBC & its life insurance unit Great Eastern Holdings announced that they have been approached  with  an  offer  to  purchase  their  combined  stakes  of  18.2%  in  Frasers  & Neave  (F&N)  and  7.92%  in  Asia  Pacific  Breweries  (APB).  Based  on  the  last  traded prices,  the  value  of  the  group's  stakes  in  both  companies  amounted  to  S$2.75b.  The identity  of  the  buyer  was  not  disclosed  but  TCC  Group/ThaiBev  subsequently confirmed  that  it  was  in  discussions  with  OCBC/GE  on  a  possible  acquisition  of  their stakes in F&N and APB.

F&N  is  a  conglomerate  with  interests  in  property,  printing  and  publishing  and  food  & beverage.  But  the  crown  jewel  is  arguably  the  40%  stake  it  holds  in  APB.  The  global brewery  space  has  been  consolidating  in  recent  years,  with  large  players  acquiring their smaller peers to expand in emerging markets. In June this year, Anheuser-Busch Inbev NV bought out the reminder of Mexico's Grupo Modelo SAB for US$20.1b, while SABMiller  bought  over  Australia-based  Foster's  Group  in  a  A$11.5b  transaction  last year.  APB  is  by  far  the  largest  brewery  player  in  the  Asia-Pacific  region,  with  an extensive presence across 14 countries, including market leadership positions in high-growth and populous markets such as Indonesia and Vietnam.

Given  the  small  public  float  in  APB  (<11%),  brewery  players  that  are  keen  to  take  a stake in APB has been doing so indirectly by investing in F&N. Back in July 2010, Kirin Holdings, a Japanese brewer, bought over Temasek Holdings' 14.7% stake in F&N for S$1.34b,  or  the  equivalent  of  $6.50  per  F&N  share.  The  latest  interest  expressed  by TCC  Group/Thai  Bev  in  F&N  is  likely  to  be  driven  by  the  same  motivation  of  getting exposure to APB's extensive Asia-Pacific footprints. If the deal is consummated, TCC Group/Thai Bev will emerge as the largest shareholder in F&N with a 18% stake. Over time,  it  can  continue  to  build  on  this  stake  and  tighten  its  control  over  APB,  together with  the  acquisition  of  a  7.92%  direct  stake  in  APB  from  OCBC/GE.  The  above scenario represents a potential threat to Heineken NV's current position as the largest shareholder  in  APB  (shareholding:  42%)  and  it  has  commented  that  it  would  actively review  its  options  with  respect  to  the  latest  development.  APB  has  a  close  working relationship  with  Heineken  in  Asia  and  currently  manufactures  and  distributes  the Heineken  beer  brand  in  9  Asian  countries  under  licensing  agreements.  Given  the strategic importance of APB to Heineken, we would not rule out any counter-offer from Heineken to protect its interests in the Asia-Pacific region.  Heineken is deep-pocketed and generates over US$2.5-3b of free cash flow annually, and would be in a position to put in a competitive bid for the stakes in F&N and APB, should it decide to do so.

We compared current valuation of APB against a basket of its peers. Based on our  FY12 net profit estimate  of  $410m,  APB  is  currently  trading  at  23x  FY12  P/E  against  the  peer  basket's  26x  P/E. Factoring  in  a  control/takeover  premium  and  better  growth  prospects,  we  believe  the  stock  could trade as high as 28x FY12 P/E, or $45.00 per share, should a bidding war ensues. 

Source: OSK