The F&N saga

I FEEL nostalgic this week. On July 18, the OCBC Group in Singapore sold to Thai Beverage Ltd (ThaiBev) its significant interest in the F&N group of companies, Fraser & Neave Ltd (listed on the Singapore Exchange Securities Trading Ltd, SGX).

For the first time since 1883, management and control of F&N will soon no longer be vested in Singaporeans working closely with the Lee family group of companies (LFG). I have been associated with the LFG for the past 16 years, having served since 1996 on the board of directors of F&N Holdings (FNH) in Malaysia, its plc listed on Bursa Malaysia (the stock exchange in Kuala Lumpur), as well as at various times on the boards of some LFG in Singapore and Malaysia.

The deal and the man

ThaiBev (listed on SGX) has entered into sales andpurchase agreements with OCBC Ltd, Great Eastern Holdings Ltd, and Lee Rubber Company (Pte) Ltd to acquire 22% of the issued share capital of F&N for S$2.78bil (at S$8.88 per share). F&N has three core business food and beverages, properties and publishing & printing. F&N's soft drinks and dairies business is generated through FNH with operations and investments in Malaysia, Singapore, China and Vietnam, while its beer business is conducted via Asia Pacific Breweries Ltd (APB), listed on SGX, operating 31 breweries in 15 countries in Asia Pacific. F&N's properties business is based on two SGX listed real estate investment trusts, while its publishing and printing business is conducted through Times Publishing. Concurrently, all three vendors sold their APB shares, or 8.6% of the issued capital of APB, for about S$1bil (at S$45 per share) to Kindest Place Groups Ltd. This company is owned by Chotiphat Bijananda, son-in-law of Charoen Sirivadhanabhakdi, controlling shareholder of ThaiBev. Both companies are deemed legally independent of one another.

Charoen is a self-made billionaire (rated by Forbes as the second wealthiest man in Thailand with a net worth of US$5.5bil) who made his fortune in beer and whisky, and properties. He is known famously in Thailand for introducing, producing and distributing the competitively-priced Chang beer in joint venture with Carlsberg, to rival market leader, Singha beer. Though low profile, he is aggressive in expanding his business in the region, including the non-alcoholic segment. He has property investments in Thailand, New York, Singapore and Australia. Charoen is known to have an interest in English Premier League soccer club Everton, whose jersey advertises Chang beer. His acquisition of a significant stake in F&N represents a serious foray to expand his footprint deeper into East and South-East Asia.

F&N first 100 years

Its 2011 annual report stated: “A household name to many, F&N has established itself as a leader in the food & beverages arena in Singapore and Malaysia since the 1930s. Beyond soft drinks, it has successfully ventured into brewing beer in 1931 and dairies in 1959... Today, the group owns a portfolio of reputable brands including F&N, 100PLUS and Seasons for soft drinks; F&N, Magnolia, Nutrisoy, Fruit Tree Fresh Juice and NutriTea for Dairies; and Tiger, Anchor, Baron's and ABC for Beer.”

F&N (the popular abbreviation) has a long history going back to 1883 when John Fraser and David Neave formed “The Singapore & Straits Aerated Water Company” to produce aerated waters. As it flourished, a new public company, Fraser & Neave Ltd, was formed in 1898. The company set up its first branches in Kuala Lumpur and Penang in 1905. It weathered difficulties of WWI in rebuilding its productive capacity. The inter-war years represented two decades of significant diversification for F&N. Among its major milestones were a diversification into brewing beer in 1931 and later, securing the Coca-Cola franchise in 1936. These two unrelated events helped transform F&N into a major company in the region.

A joint venture with Dutch brewery, Heineken NV, gave rise to Malayan Breweries in 1931producing Tiger beer. At the outbreak of WWII, a rival Germany brewery (Archipelago Brewing Company) was set up in Singapore to produce Anchor beer. This was acquired by F&N after the war, and the two beers have been produced in their separate breweries ever since. F&N brought in the Coca-Cola franchise for Singapore & Malaysia in 1936. It was a difficult year the world was in the throes of an impending double-dip recession. After liberalisation in 1945, the company survived unsettled conditions and rehabilitated, demonstrating its fortitude and resilience.

Lion Ltd was formed in 1948 to manage Coca-Cola. New productive capacities were built and exports revived. Both arms of the company's business expanded rapidly. Strategic acquisitions in the 1950s by Malayan Breweries expanded its business to span the South Pacific and New Zealand. In 1959, F&N secured another prestigious first the 7-Up franchise.

The company enjoyed another decade of strong growth and diversification in the 1960s. In 1961, it set up of a joint venture factory with Beatrice Foods of Chicago producing sweetened condensed milk (SCM). Later in 1966, Carnation International of Los Angeles joined the enterprise and the operation was enlarged and renamed Premier Milk (M). It integrated production combining SCM, evaporated milk and the manufacture of its own cans in 1968. Although Malaysia and Singapore separated in September 1965, F&N forged ahead in expanding its businesses and investments in both Singapore and Malaysia seamlessly.

By the end of the decade, F&N brought in new bottling capacities and investments to strengthen distribution networks and warehouses as well as in advances in technology. The 1970s and the early 1980s continued to see phenomenal growth, including new franchises (Fanta, Sunkist orange, Schweppes); investment in high speed manufacturing processes; entry into glass containers; launch Meadow Gold ice-cream; commit equity in Metal Box (S) Ltd and become the sole brewer in PNG.

In June 1983, F&N's 100-year book “1883-1983: The Great Years” stated: “A century ago, two enterprising printers sought to put more fizz into their business by diversifying into soft drinks... the project which they pioneered become a multi-million dollar organisation that has since sold more than 12 billion bottles of soft drinks which, laid end-to-end, would encircle the globe 75 times... But F&N is more than soft drinks today. It has established a spectrum of interests in the beverage, packaging and related industries, making it well diversified both in product and territory.”

The last 30 years

Since its centennial in 1983, F&N added two new pillars to its main core business of food & beverages, viz. properties in 1990 and publishing & printing in 2000, reflecting the impact of its ever growing legacy of enterprise. The history of its next 20 years: “F&N, Beyond the First Centennial” has been documented. The company had since expanded and re-structured in a robust and innovative manner. F&N's long history presents, in my view, a good case study of how a singular seed of an idea, nurtured with passion and perseverance with good follow-through, and some good-luck to boot, can grow unfettered into a giant of an enterprise. F&N's performance over 10 years since 2001 is exemplary as elaborated in its 2011 annual report for FY11:

Revenue of S$6.27bil, up 157% over 10 years.

Profit (before interest and tax) of S$1.16bil, up 185%: 32% came from beer business; 13% from non-beer business, 49% from property business (of which 35% was from property development).

Attributable profit of S$621mil, up 209%.

Earnings per share of S$0.44, up 227%.

Market capitalisation of S$8.75bil, up 299%.

Share price of S$6.20 as at Nov 16, 2011, against S$1.44 on Sept 30, 2001.

Over these 10 years, revenue rose cumulatively at 10% a year.

Takeover blues

Since the ThaiBev purchase, Heineken NV (F&N's JV partner at APB) launched a swift defence of its interests, offering to purchase F&N's entire stakes at APB for S$5.1bil, or S$50 a share (against a closing price of S$42, and 45% higher than its weighted monthly average). If successful, Heineken would follow up with a mandatory general offer at the same price for all APB shares it does not already own, for another S$2.4bil. The market noted this to be a pricy offer, valuing APB at about 17.5x 2012 earnings (before interest, tax, depreciation and amortisation). The medium multiple for major brewery takeovers in the past five years was 13. Acquisition cost would total S$7.5bil. But APB is a high growth firm with significant strategic importance to Heineken.

At stake is the fast growing Asian beer market (Tiger has 35% of Singapore's market and Bintang, 42% of Indonesia), supported by young consumers with rising incomes, and holding rare brewing licences in Islamic nations. Heineken is APB's largest shareholder (42% deemed interest) and F&N, its second largest at 40%.

Their JV contains change of control, operations and other terms designed to protect both parties. This makes it not easy in practice for APB to be sold to a third party. It's understandable why Heineken talks of a “consensual deal” with F&N, but “will review all options available to protect its commercial interests... to look ahead to the next chapter of its Asian business.”

OCBC's sale is understandable in line with “its strategy of divesting its non-core assets and re-investing in its core financial business.”

It's a clean deal bringing in S$3.216bil of cash into the group, with a post-tax gain of S$1.153bil. For ThaiBev, its purchase now gets complicated since it stands to lose its initial exposure to APB through F&N. ThaiBev is seen in the market as Heineken's key regional rival.

But Kindest Place Groups could reap a handsome profit. It would appear Japan's Kirin, F&N's second largest shareholder at 14.96%, would likely lose its exposure to APB as well in the event F&N sold out. It is constrained in firepower to challenge Heineken, considering its net debt to equity is already at 102% in 4Q11, even though it has cash worth US$1.07bil. So far, Kirin has stood at the sidelines.

Surely, it can't just do nothing. It has hired Deutsche Bank for advice. At worse, Kirin & ThaiBev could act together (holding 37% of F&N) to try and block the Heineken deal.

What's F&N to do?

F&N has a dilemma. It's beer and non-beer beverage businesses account for 59% of total revenue in FY11. APB contributed one-third of total profits. Losing it would put a huge dent on its earnings, something it can ill afford after losing the Coca-Cola franchise last year. If the deal goes through, it brings in S$5.1bil in new cash.

But how can it best use this cash to rebuild? F&N's food & beverages will be left with just its Malaysian operations, where it has a 56.4% direct stake. For FY11, they contributed only S$150mil or 13% of group overall profits.

If F&N stands firm on the status quo, Heineken could force a hostile bid for APB. This can get ugly and messy. Even if F&N sold APB, the possibility of F&N breaking up could be on the table. F&N Holdings, with its many soft drinks and dairies household names and a strong regional distribution network, offers an attractive base for Kirin and ThaiBev.

For some time, Coca-Cola is known to have interest in buying the firm, especially its brands and effective distribution network.

It should not surprise if Pepsi-Cola also weighed in. After all, 100-Plus and Seasons are attractive, dynamic brands bear in mind 100-Plus surpassed Coca-Cola in volume sales in recent years. The sum-of-the-parts at F&N appears to be worth more than the whole of the company. In the end, F&N must decide what it wants to be. It has since engaged Goldman Sachs for advice.

These are personal thoughts. I have no inside information. So the fun begins.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who speaks, writes and consults on economic & financial issues. Feedback is most welcome; email:

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