The Khemka group of India, who are the founders, managers, and proprietors of the SUN Brewing Ltd., faced a significant problem in 1998. Based in Russia, the company was affected by the Russian financial crisis including the devaluation of the currency along with other economic crises. The company is left considering two primary options: to wait it out as in weather the storm until better terms can be expected from the outside capital investor or to bring in a global beer company as a partner right away to remain as controlling proprietors and inject a tremendous amount of money to the company.
Belen Villalonga; Raphael Amit
Harvard Business Review (207022-PDF-ENG)
August 17, 2006
Case questions answered:
- What made the Khemka family decide to enter the beer market in Russia in 1992? How did they find themselves in the situation they were in at the time of the case? What could they have done differently?
- Why beer? The Khemkas don’t drink beer, don’t know how to make beer, and don’t really know the beer market anywhere in the world. And why beer in Russia? Don’t Russians drink vodka?
- So how did they do it?
- How was Sun Brewing’s growth financed?
- What do we know about private placements?
- The next time the Khemka family raised equity was through a rights issue in September of 1994. What exactly is a rights issue? Is this a common way of issuing equity?
- How about GDRs? Is this really high finance or a fairly standard way of raising capital? Why did Sun Brewing issue GDRs?
- What do you think about the 60%-interest loan that had to be structured as a repo to bypass usury laws?
- What about the IPO? Does December 1995 sound like a good time to take SUN Brewing public?
- Why did they do it, then?
- How did the private placement investors do as a result?
- Except for the 60% loan, all the sources of outside capital the Khemkas tapped into were equity. Why didn’t they use more debt? Could they? Should they?
- What was the problem with the situation in 1999?
- What were SUN Brewing’s financing needs in March 1999? How much was the company worth?
- What risks were associated with investing in a Russian beer company in 1999?
- Suppose you are Shiv Khemka… you need $38 million immediately to keep the company afloat, plus $76 more if you want to keep it running for the next few years. What were the pros and cons of the different alternatives (listed below) available to the Khemka family in 1999?
a) Stay the course (go it alone)
b) Bring in a strategic (joint venture) partner
c) Bringing in a financial partner
d) Sell off completely
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SUN Brewing (A) Case Answers
Introduction – SUN Brewing Ltd. and the Khemka Group of India
The Khemka group of India, who are the founders, managers, and proprietors of the Russian-based company – SUN Brewing Ltd. – faced a significant decision to make in 1998.
The family chose the beer company as it was appealing, and looking at the Russian market in the 1960s, the brewing capacity was located in each region, and the competition was limited. The market was vast, with many opportunities, and at that time, there were only two cities that imported foreign beer.
The Russian financial crisis which included the massive Ruble’s devaluation and the country defaulting on public and private debt. Also, the stock price of SUN Brewing Ltd., which was open on the Luxembourg Stock Exchange, was rejected by almost 90%.
A few weeks earlier, the company had planned a $200 million to $400 million equity and debt offering to the New York Stock Exchange (NYSE) to invest in major other fields when confronted with the intense competition from the other beer companies in the Russian market.
However, the devaluation of the currency, along with the economic crisis, resulted in the cancellation of the NYSE and a $400 million bridge loan, which was to be paid back. Lastly, SUN Brewing Ltd. is left to discuss two primary options:
- To wait it out, as in weather the storm until better terms can be expected from the outside capital investor.
- To bring in a global beer company as a partner right away to remain as controlling proprietors and inject a tremendous amount of money into the company.
1. What made the Khemka family decide to enter the beer market in Russia in 1992? How did they find themselves in the situation they were in at the time of the case? What could they have done differently?
SUN Brewing Ltd., which is a subsidiary of the Khemka family business, was founded in 1992 by Mr. Shiv Khemka with Nand, his father, and his brother, Uday, and has become the second-largest beer producer in Russia. Mr. Shiv Khemka entered Russia in the summer of 1990 because his father urged him to think about the future of the business.
Seeing Russia as a potential investment by Mr. Shiv, he started to create a team of business consultants to chart out opportunities in the sectors in which the company could invest.
It seems as though the business opportunity for beer was identified and worked upon in a concise period as the family business was back in India, which involved mining in the 1950s, after which it became an importer of mining equipment and capital infrastructure (Financial Express, 2004).
Russia had just emerged as a reform centered on privatization. After six months of extensive research, the team came out with a list of the top two industries of choice, which included beer and chocolates with oil and gas.
Mr. Shiv decided to focus on beer since beer was under the radar at that period. He invested in the brewery market, and he built it to be the second-largest producer in Russia.
Mr. Shiv was also very fortunate because he entered Russia at a historic time when communism was being let go, and the Russian economy was fast forming. The country of Russia was also politically sensitive at that time, and Russia had a group of young economic reformers in place.
In my opinion, Mr. Shiv could have…
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