Heineken Seals $400M Bravo Deal

By Andrey Musatov

Staff Writer

Published: February 5, 2002 (Issue # 742)

Europe's biggest brewer, Dutch-based Heineken, announced on Friday that it had signed an agreement to acquire St. Petersburg's Bravo Holding for $400 million.

The purchase, which officials at Heineken said would help them move into a Russian market that still has room for growth, not only brings the European holding the popular local Bochkarev brand, but will also allow more market penetration for its own flagship label.

"With this acquisition, Heineken gains a foothold in the expanding beer market in Russia," a statement released by the firm said. "The transaction is valued at a maximum amount of $400 million, provided that volume and price targets are met in the next 12 months."

According to Manel Vrijenhoek, press officer at Heineken, the price is a reasonable one to pay for Bravo's facilities, brands and expertise.

"We think that it's a good price for a company that has shown such strong growth," she said in telephone interview on Monday. "The next few years will bring at least 6-percent annual growth, especially considering that there is room for growth on the beer market."

"And, as we already have such a strong position in Europe, the company's management decided to focus on markets in Russia, Asia and Latin America," she added. She also said that Heineken planned to launch a line producing its own beer here.

"Because Russia has very high import duties, the Heineken brand will have a competitive advantage in the Russian premium market when it is brewed inside the country itself," she said. "Basically, we are not planning to change Bravo's structure and strategy because we see no point in reorganizing a system that is working well. We will fill some positions in management, while the present team will likely stay."

Bravo International was set up in 1993 by two Icelandic businessmen, Thor Bjorgolfsson and Magnus Thorsteinsson. The local brewing facility, which began production in 1999, is the sixth-largest single-site brewery in Europe.

Although the brewery has only been in production for three years, Bravo has already acquired a 17-percent share of the St. Petersburg market and a 7-percent market share in Moscow, according to a Heineken statement. The company's highest-profile brands are Okhota and Bochkarev. The brewery also produces the Lowenbrau brand under license.

In 2001, Bravo sold 230 million liters of beer and 40 million liters of mixed alcoholic beverages. Projected sales for 2002 are 400 million liters.

Heineken is the world's second -largest brewer behind U.S.-based Anheuser Busch, which produces the Budweiser brand. Heineken has 110 breweries worldwide and has over 80 brands available in more than 170 countries.

According to the Heineken press service, the size of the Russian beer market has doubled over the last three years, reaching a total sales volume of over 6 billion liters in 2001. Further market growth is expected to rank Russia among the world's top five beer markets in the next few years.

Vrijenhoek said that Heineken will continue to develop Bravo's mixed-drinks lines in a separate company and will finance the entire acquisition with its own capital. Final closure of the deal is expected in the first quarter of 2002.

According to Stephen Ogden, the chief financial officer of Bravo International, "this is one of the most significant consumer-goods deals in the history of Russia."

"Bochkarev is a good national brand and, although we believe they will produce Heineken beer, the priority will stay for rapid growth of Botchkarev brand," he said Monday. "This purchase represents strategic investment and, above the $400 million Heineken is going to pay, the company will likely invest money for marketing aims."

Ogden declined comment on the total amount Bravo had invested in the plant up to the present.

Some analysts expressed surprise that it had taken Heineken so long to make the move.

According to Kim Iskyan, an equity strategy analyst with Renaissance Capital Research, Bravo brewery was "made out of nothing and selling it on had always been a part of the big picture." The big question, he said, is why in a market so full of foreign investment did the purchase come so late?

"Heineken has been looking for a way to get into the Russian market for years," Iskyan said. "Now they are getting in late, so they're having to pay the price. It's not ideal from their perspective - ideally they would have done it five years ago. Now they're playing catch-up."

According to Vladislav Mamontov, the head of the Russian Brewers' Union executive secretariat, industry experts generally believe that the Russian beer market has already been carved up by the existing players.

"A lot of analysts think that Heineken is getting here too late," he said. "On the other hand, the willingness of such a major player to move into the Russian market at this time suggests that the market is only in the early stages of it's development."

He also said that the price paid by Heineken is consistent with the amount necessary for the construction of a brewery and the promotion of brands.

"Meanwhile, Bravo is already listed among top 10 beer producers, so [Heineken] made a reasonable decision," he added.

The top four positions in the Russian market are occupied by Swedish-controlled Baltika, with more than 20 percent of the market; Belgian Sun-Interbrew with about 15 percent; Ochakovo and Krasny Vostok.

With regard to beer consumption, Russia has a long way to go to catch up with the world leaders. Per capita, Russians drink just 37 liters of beer a year, while Germans, the biggest beer drinkers, consume 131 liters, the Financial Times reported, citing industry estimates.

Last year, 6.27 billion liters of beer were produced in Russia, up 14.5 percent from 2000, according to the Russian Brewers' Union. Growth of 10 percent is expected for 2002.

It was not immediately clear how much beer Heineken imported to Russia last year. However, imported beer accounts for a mere 1.5 percent of the market, according to the Russian Brewers' Union.