291 HK: Jon's Beer is Now Really, Really Cheap

Jon Foster's original piece on the CRH deal for 70+% of CRE's assets suggested "Beer is Cheap, but is it Cheap Enough?".

I put out a set of tables on the Arb considerations (buy shares, tender, own the residual piece and measure the valuation of that residual based on applying profits/losses on the first leg to the final position).

I played devil's advocate in a followup, "An Expensive Way to Get Cheap Beer" suggesting that CRE was selling its non-beer assets too cheaply. This was partly because China was in a bull phase and 100% of SHCOMP was trading at least 25% higher in terms of PBR than the purchase price of the assets. Further, there wasn't a valuation buffer on CRE NEWBREWCO.

That has changed dramatically. First CRH upped the terms. Now CRE shares have fallen as H-shares and A-shares get pummeled on a "Get Me Out" trade.

But even once-euphoric now-despondent punters drink beer and many probably now need a beer to cry into.

"Deal Leverage" Creates Real Value Here.

If you buy $10 of CRE today, you are being taken out of $7 in the deal, and the remaining $3 (at 22.80 as I write) is trading at 10x trailing EBITDA assuming a 50% fill ratio (minimum is 41.5%) and probably 8.5x consensus 2016 EBITDA. If you assume a 60% fill ratio, the $2 you have net invested on a forward basis is trading at 7x EBITDA.

At a 60% fill ratio on the back end tender, a 1% move on CRE today is equivalent to a 5% move on NEWBREWCO. Down 7% this AM on CRE was the defensive beer company NEWBREWCO trading down 35% vs yesterday.

Jon's Beer is really quite cheap this morning.

Assuming the deal goes through....

• What are the risks that China's 20th largest SOE walks away from buying grocery and food store (consumer staples) assets which are growing revenues at 18% a year the last 5yrs because of what is happening in A-shares? I think the risks are low.
• What are the risks that H-share investors reject the deal? I think those risks have just gone WAAAAAY down.
• I think this is worth a MUCH closer look. Even if the sweeping multitudes stop punting A-shares, they will still drink cheap beer. And CRE is China's biggest beer brand.