Will ThaiBev swap its FCL shares for Fraser & Neave?

The potential exercise could involve swapping its 28% stake in FCL for a 60% stake in F&N.

Thai Beverage Public Company Limited (ThaiBev) previously guided that the long-awaited swap to consolidate Thai conglomerate TCC's stake in Fraser & Neave (F&N) under ThaiBev would be completed by the end of 2017. However, the company missed this target.

According to Credit Suisse, through the acquisition of F&N by ThaiBev and TCC in 2012 and 2013 and then the subsequent listing of Frasers Centrepoint Limited (FCL) in 2014, ThaiBev holds a 28% stake in both F&N and FCL whilst TCC holds a 59% stake in both.

The potential exercise could involve ThaiBev swapping its 28% stake in FCL for TCC's 60% stake in F&N.

"Based on the current market valuations, we estimate that ThaiBev's stake in FCL is worth about $1.7b, while TCC's stake in F&N is worth about $2.2b, leaving a shortfall of $500m, which may be satisfied by cash," said Credit Suisse analyst Nicholas Teh.

Here's more from Credit Suisse:

For 2018, FCL's estimated net profit of $512m is close to 5x larger than F&N's $112m.

As such, we estimate that the reduction in ThaiBev's share of associate profits from relinquishing its stake in FCL is unlikely to be fully replaced by a larger share in F&N.

We estimate that holding a 90% stake in F&N without a stake in FCL would lower ThaiBev's net profit by 3-4%. However, the main benefit for ThaiBev would be to become a purer beverage play as a result of the exercise, which could allow for a higher valuation multiple.

We would note that with ThaiBev’s successful bid on Sabeco, gearing will rise above ThaiBev’s internal limit of 2.5x net debt to EBITDA, and according to the company, debt covenants limits will not be breached with the additional debt, and we do not expect ThaiBev to raise equity to reduce gearing.

Moving forward, an FCL/F&N shareswap with cash top up is likely to raise gearing levels even further, as such, it raises the question on whether or not ThaiBev could look to simply sell its stake in FCL to become a pure beverage play rather than execute a swap.