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Czech beer
October 28, 2009

InBev sells Staropramen brewery to offset losses

CVC is expected to buy the brewery for 40.1 billion Kč

Prague 5’s historic brewery could come under new foreign management next year. A foreign investment firm has offered to purchase the Czech Republic’s second-largest brewery in a deal that is expected to close Jan. 1, 2010.

Anheuser-Busch InBev reached an agreement Oct. 15 to sell Staropramen for $2.31 billion (40.1 billion Kč) to CVC Capital Partners, a global private equity firm. The transaction marks CVC’s first investment in the CEE region and will secure the brewing and marketing rights to all of the brands that fall under Staropramen’s aegis, including Stella Artois, Beck’s, Löwenbräu, Hoegaarden and several others. Additionally, CVC will secure operating rights not only in the Czech Republic, but in several other countries in the region, including Slovakia, Hungary, Bulgaria and Romania. The international strength of Staropramen’s branding was one of the key attractions for the deal, said István Szőke, head of Central and Eastern Europe at CVC.

“The acquisition marks the first investment in the region for CVC, and we are delighted to acquire such a strong business with iconic brands, experienced management and dedicated employees,” he said. “CVC is committed to developing the group – to be renamed StarBev – into the regional champion and will work with the local management teams and employees to achieve this goal.”

For the Czech beer industry, 2010 could be a turning point, as recent tax hikes on alcohol have forced many breweries, including Staropramen, to raise the price of beer. A new government austerity budget for 2010 hopes to cut next year’s forecasted state deficit from 230 billion Kč to 162.8 billion Kč, or 5.2 percent of the gross domestic product (GDP). Part of those measures to boost revenue includes an excise tax hike on beer that could amount to as much as 1 Kč more per beer depending on the amount of beer produced.

Even large Czech breweries such as Staropramen will have difficulty shouldering the 15 million-18 million Kč in yearly expenses the tax increase will bring and will be forced to raise prices, said Jan Veselý, president of the Czech Beer and Malt Association.

“Retail chains are not willing to increase beer prices, so the breweries will have to largely absorb the cost,” he said. “Even large breweries are small compared with retail chains, so they must consume the price dictatorship.”

Staropramen, which accounts for 15.6 percent of Czech beer sales, sold 3.26 million hectoliters of beer in the Czech Republic and abroad last year, setting an annual record for the company. Despite the rise in sales, the brewery saw profits decrease almost 50 percent in 2008 to 289.6 million Kč. Combined with the European recession, such losses have forced InBev to re-evaluate its core markets and refocus its sales strategies, making the sale of Staropramen particularly alluring, said Karen Couck, external communications manager for InBev.

“We have gone through a disciplined process of reviewing our global footprint and determined that, though strong businesses, the sale of our Central European business would allow us to better focus our resources while, at the same time, enabling us to exceed our target of $7 billion in divestitures announced following the combination of Anheuser-Busch and InBev in November 2008,” she said.

Szőke has repeatedly said the strength of Staropramen’s brands was one of the key factors in the transaction, and that the company’s local employees and management were inherent to the company’s success and, thus, would not be affected by the transaction. Staropramen General Manager Zbyněk Kovář echoed these comments, saying, “For our consumers and business partners, as well as for our employees, the change in our ownership won’t change a thing. ? We will continue to provide the same range of beers and related services to our consumers and customers.”

Besides the sum CVC will pay for Staropramen, the contract between the two companies stipulates “additional rights to a future payment estimated to be as much as $800 million contingent on CVC’s return on its initial investment.” In addition, InBev retains the right of first offer to reacquire the business should CVC decide to sell it in the future, a condition that has led some to speculate the transaction is a short-term deal to help InBev cut its losses and repurchase the company after it has regrouped. Spokespersons for both InBev and CVC were tight-lipped about the details of the buyback clause and the $800 million future payment. One source involved with the deal said even if CVC were to sell Staropramen back to InBev, it wouldn’t be anytime soon.

“There is no minimum or maximum time for holding the company, but CVC tends to hold its investments for five years or more,” the source said.

The Czech beer industry is likely to shift its focus to exports to avoid the worst effects of the tax hikes, but even a paradigm shift won’t be enough, according to Veselý. The domestic market declined 6.5 percent last year, while exports decreased 12 percent, he said.

“Everyone is focusing more on exports, but the impact of the crisis on the beer industry is much stronger in countries that don’t consider beer such a strong commodity,” he added.

The Czech Association of Small Independent Breweries sent an open letter to Prime Minister Jan Fischer Oct. 23, calling for greater solidarity with the Czech brewery industry and calling into question the wisdom of targeting beer and wine producers with tax hikes.

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