Afternoon Class Group1 Project with Berkshire Hathaway(Jinro)


Project with Berkshire Hathaway

(Deal Proposal of Rainmaker Partners, a PE company established by members of group 1)

I. Proposal background


Warren E. Buffett, chair man of Berkshire Hathaway, visit to Korea for delivering his speech at Korean International finance conference. During visit in Korea, he expressed that Korean liquor market is very attractive and interesting when he joined several ceremonies and meetings.

Rainmaker Partners LLC will propose joint investment to Berkshire Hathaway for buying equity of Jinro co, the largest liquor (SoJu) producer in Korea, and this is the material for the proposal.

Project Members of Rainmaker Partners

Members Role in The Project
Lee, Jung Soo Market Research
Kim, Na Young Company Research
Han Kyung Hee Financial Analysis
Sun, Young Mee Coordination, Editing
An, Rak Hyun Deal Structuring Investment Rationale

II. Company analysis

1. Company Background – Jinro Co.

  • Company: Jinro Co. Ltd
  • Established: 1924
  • Representative: Yoon, Jong Woong
  • Headquarter: Seoul, Korea
  • Acquisition by Hite Holdings: 2004
  • Industry: Brewing
  • Sales (FY2008): 735 billion KRW
  • EBITDA (FY2008): 167 billion KRW

Sales Breakdown & Sales Breakdown by product





2. Company Background - Hite Holdings

  • Company: Hite Holdings
  • Established: 1933
  • Representative: Park, Moon Dok (CEO)
  • Headquarter: Seoul, Korea
  • Industry: Brewing (Soju, Beer)
  • Subsidiary: 9 (excluding unconsolidated subsidiaries)
  • Sales (FY2008): 1099.7 Billion KRW
  • EBITDA (FY2008): 231.7 Billion KRW

Corporation Structure


Share Holders


Key Financials – Jinro Operation only

Income statement of Jinro Operation


Balance sheet of Jinro Operation


Key Financials – Hite Holdings(consolidated)

Income statement of Hite Holdings


Balance sheet of Hite Holdings


III. Deal Background

  • Hite Holdings (Jinro) may seek new investors for put option (954.9bn KRW) that schedule to exercise by Sep. 2010.
  • Rainmaker Partners & Berkshire Hathaway can purchase put option equity or inject capital to Hite Holdings directly.

Precedent Transaction Log


IV. Proposed Transaction

  • Acquisition of FI’s stake and succession of all investment terms
  • 2010 IPO / Put-option exercise

Investment Terms

  • Guaranteed IRR of 8.2%(MMAA) / 8%(KTCU, KFCC) by 2010.9.28
  • Right of first refusal by Hite Holdings
  • Tag-along rights
  • Call option by Hite Holdings on maximum 20% of KTCU, MMAA, KFCC holdings prior to either 2010.9.28 or IPO - IRR 10%
  • Board participation with 8% or more stake
  • Approval right regarding capital increase, dividend payout, asset sale/swap/pledging, etc.

V. Investment Rationale

1. Dominant market position

  • A Korea’s #1 leading liquor producer with 51.4% of total Soju market share.
  • Over 80% of Soju market share in greater Seoul Metro and Gyeonggi.

2. Strong brand image and high customer loyalty

  • World’s best selling spirit brand.
  • High customer loyalty which influenced by previous compulsory purchase regulation.

3. Successful financial record and stable cash flow generation

  • Stable demand growth with relatively (in comparison to other industries) lean working capital requirements due to high barriers to entry.
  • Limited capex spending as the procurement of glass or containers is linked to the production volume.

4. Solid distribution channel and bargaining power

  • Maintain and improve a healthy relationship with domestic wholesalers in the greater Seoul Metro and nation wide.
  • Anticipate stronger ties with the wholesalers due to the merger of Hite and JINRO.

5. Value creation opportunity

VI. Precedent M&A transaction

  • Precedent M&A transaction in Korea EV/EBITDA multiples range from 10.6x to 14.6x.
  • Jinro acquired by Hite Holdings Sales/EBITDA multiples 4.8x in May 2006, and implied Sales/EBITDA multiples is 4.4x in 2008.

Precedent M&A transaction multiple in Korea


VII. Market analysis

1. Alcoholic Beverage Market in Korea

  • The market for Korean alcoholic beverages has been a mature one with 3% or lower growth in products sold for several years. Korean alcoholic beverage market is largely categorized with Soju, beer, whisky, Cheongju (rice wine), Yakju (rice wine) and wine.
  • In 2007, Soju and beer represent 90% of the total market where KRW 6.8 Trillion is made up of KRW 2.6 Trillion for Soju and 3.3 Trillion for beer. What is worth noting is that age groups of 25 to 44, heaviest liquor consumers, have grown from 2.4% in the 60s to 34% in 2005, of the total population.
  • Soju accounts for 40% of the total liquor market in 2007. As a highly stable growth market, it is less sensitive to the changing economic conditions, while the years being an exception that saw a huge tax surge on Soju from 35% to 72%.
  • Soju sales have been growing at relatively low 5% for several years until a drop in overall consumption with economic slowdown began to bring up the numbers in Soju sales. The number of Soju shipments and net sale price are showing stable and consistent increases with respect to GDP growth and inflation rates.

2. Market share (Soju) in Korea


3. Market size of Soju and beer in Korea

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License