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Lion seeks to reduce gearing through Rs. 1.2 bn. cash infusion

Lion Brewery (Ceylon) PLC, market leader in beer here and now expanding into India, is seeking to infuse Rs.1.2 billion into the company through a 5 for 3 rights issue at a price of Rs.40 per share.

Shareholders have been told that this BOI enterprise whose tax holiday ends next year is seeking to reduce gearing with the new cash infusion and, although the rights issue is not underwritten, the Carsons group of companies with nearly 79.5% of Lion will be taking up their entitlement.

Three Carson’s subsidiaries, Ceylon Brewery, Ceylon Guardian Investment Trust, Ceylon Investments and Carsons itself together with Carlsberg Brewery Malaysia having indicated in writing that they will take up their shares.

Lion brews its own beer brand as well as the international brand, Carlsberg, under license in its Biyagama brewery.

In 2006 Lion joined with Carlsberg to float South Asian Breweries (Pvt) Limited by taking up a 22.5% stake in that company.

South Asian Breweries in turn invested in Carlsberg India to diversify into the lucrative Indian beer market.

"Though lucrative in prospects, the Indian investment is long term in nature and therefore will need to be funded appropriately with longer term funds," Lion shareholders have been told.

Lion has explained that the primary reason for the rights issue is to reduce the current high gearing level that resulted consequent to the investment in South Asian Breweries funded with short-term borrowings.

As at June 30, Lions outstanding short-term loans and bank overdrafts topped Rs.1.6 billion and the proceeds of the rights issue will be utilized to settle part of the short-term borrowings and reduce gearing.

"Also by reducing the gearing level, it will become possible for the company to release funding lines which can be utilized for the Sri Lankan operation and its working capital requirements," Lion said.

"The release of funding lines will further enable the company to structure and source funding requirements with greater competitiveness specially benefiting from the lower interest rates prevailing in the market currently."

In June 2009 the Lion share traded at a high of Rs.85 and a low of Rs.65, while in May it traded between Rs.79 and Rs.69 and in April between Rs.55.25 and Rs.55.

Lion estimated Sri Lanka’s beer market to be currently around 50 million litres per annum with the market space currently occupied by three players.

Lion has held market leadership since inception of its brand by its partent, the Ceylon Brewery, in 1881.

Per capita beer consumption here at around 2.45 litres is very low compared to most Asian countries and Lion believes the company has a unique opportunity to grow its business subject to the prevailing regulatory and policy framework.

"Further, the end to the civil war and resulting peace is expected to increase economic activity and ease security restrictions and concerns. This will provide impetus for higher level of entertainment related activities and will help grow the beer market in Sri Lanka," the company said.

Discussing the Indian beer market, Lion says that a large segment of young people India were aspiring to a trendy westernized lifestyle. An ever-growing segment of the Indian middle class was moving away from the traditional conservative lifestyle as a result of the affluence rising from sustained economic growth.

"With mega entertainment events such as the Indian Premier League (IPL) providing further impetus and "Bollywood" providing glitz and glamour, the young and middle class of Indian society is increasingly spending on leisure, fun and entertainment. Further the hot climate of India and its spicy food complement beer drinking," Lion told its shareholders in the circular explaining the rights issue.

The company saw tremendous opportunity in India in this context as well as the low penetration level in India’s beer market where per capita consumption at approximately one litre per annum is lower than even in Sri Lanka.

However, India’s beer market currently exceeds 13 million hector-litres per annum – 26 times that of Sri Lanka. There are large number of domestic breweries in India competing with international players such as SAB Miller, APB, AB, InBev and Carlsberg who own and operate breweries there.

The main industry players are United Breweries and SAB Miller accounting for over 80% of the market share.

"Thus any brewer who aspires to compete on a national scale in India will need to invest in the necessary infrastructure in the form of breweries and distribution networks across strategic states. Further, those brewers with national ambitions must also be willing to invest in building strong brands through relevant marketing activities," Lion said.

In the year ended March 31, 2009, Lion posted an operating profit of Rs.473.2 million, up from Rs.383.9 million a year earlier and an after-tax profit of Rs.88.8 million, down from Rs.178.4 million the previous year.

Lion’s tax holiday ends on June 1, 2010.

Lion has summoned an extraordinary general meeting on August 28 to consider a resolution approving the floating of the rights issue.

The directors of Lion Breweries are: Messrs. L.C.R.de C. Wijetunge, H. Selvanathan, M. Selvanathan, S. Shah, D.V.L. Chin, D.C.R. Gunawardena, D.R.P. Goonetilleke, C.T. Liyanage and C.P. Amerasinghe.

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