Battleground China for A-B and SABMiller
A takeover battle is brewing for Harbin Brewery, China's fourth largest brewer, between Anheuser-Busch and SABMiller. Chris Brook-Carter takes a look at Harbin and asks why a brewer with no national presence and a 4% market share is proving such a tempting proposition for two global brewing giants.
Many outside the beer industry are probably looking on in wonder at the moment, as two of the most powerful companies in the drinks industry who, between them, own some of the most recognisable brands in the world, battle it out for control of a relatively small Chinese beermaker.
Sparked last week by the acquisition by Anheuser-Busch, the world's No. 1 brewer, of a 29% stake in Harbin Brewery, the fight began to hot up when arch-rival SABMiller - which already owns a 29% stake in the Hong-Kong-based company itself - launched what has since become a hostile takeover for control of the brewer.
The question since has not been whether Anheuser-Busch will launch a counter offer - most observers seem to have decided already that they will, evidenced by the soaring shareprice - but why this rather run-down looking brewery should be the battleground for two such giants?
The price SABMiller will pay for Harbin, which made only US$15m last year, is already US$391m, before any potential bidding war has begun. The company has no national presence. In fact, only one of the hundreds of brewers in China, Tsingtao, has nation-wide reach. On top of all this, the beer market is still hugely competitive with most of the internationals operating in the country still unable to sell any meaningful volumes of their international brands and, instead, relying on sales of local brands, which retail as low as $0.25 a can.
Finally, the fight is going on at a time when experts are predicting China's recent economic boom is about to come crashing down around its knees. "New lending policies in China are triggering a fundamental rethinking of the stability of the Chinese economy. This time, no amount of damage control can hide the fact that the myth of the Chinese economic miracle is finally - and perhaps fatally - breaking apart," wrote the financial forecast website, stratfor.com, last week.
Yet, Anheuser, SABMiller and many in the investment community see Harbin as of enough strategic importance to warrant all this fuss. "We share A-B's view that China should be a strategic priority, in spite of its low-margin profit pool," said Mark Swartzberg of the equity analyst Legg Mason.
"The region's beer market is less than one-tenth the size of the world's largest profit pool, that of the US. But it is also the world's largest volume pool, is growing quickly (next five year volume CAGR of at least 5%), is likely to become more premium-oriented as the economy develops, and is poised for accelerated consolidation."
He continued: "Harbin is appealing to A-B for several reasons. Harbin is China's fourth-largest brewer with a market share of approximately 4%. Harbin (also) sources most of its business from northeast China, which has the country's highest rate of per capita consumption."
On top of this, Harbin has brands with potential national appeal, which complement those of Tsingtao, A-B's other Chinese investment, well.
China's beer market remains a very fragmented and regional affair, so Anheuser has no fear - for now at least - that SABMiller will steal a national march on it. However, the northeast is the most developed consumer region in China and, in March, SABMiller made one unsuccessful bid for an additional 29% of Harbin Brewery's government-owned stock. With SABMiller already owning a stake in another large brewery in a neighbouring province (CBR), A-B, no doubt, felt there was a danger that its arch-rival might become the region's dominant player. Indeed, if SABMiller wins Harbin, it will have a market share of more than 60% in the region.
With the 29% of Harbin Brewery's government-owned stock now in Anheuser's hands, and the balance of the stock listed on the Hong-Kong Stock Exchange, who wins the battle is down to the shareholders. Harbin Brewery's CEO, Peter Lo, has let his strong anti-SABMiller feelings known, saying late last week that SABMiller "has done nothing good for us", and "if SABMiller didn't contribute when it held 29%, I doubt what synergy they can deliver even if they raise their stake".
But despite this executive opposition, with no A-B bid yet on the table, SABMiller still seems favourite. It has already missed an opportunity to gain control of the brewer, a mistake that has let A-B in the backdoor - and it is a mistake SAB may aggressively try to rectify now.
The current SABMiller bid seems reasonable. And, given its presence in the region already, the company will likely see a number of synergies from a successful acquisition as well as being in a strong position, with its 60% share, to push through some price increases in the region.
By comparison, given the regional nature of the Chinese market, Harbin is not of such strategic importance to A-B. What's more, if it were successful, a damaging price war between the two brewing giants in the northeast is a distinct possibility, helping no one in the industry.
Interestingly, Swartzberg in a research note last week argued that Anheuser should sit tight at the moment, even if that meant SABMiller in the short term won the battle for Harbin.
"In spite of China's long-term appeal and arguably because of it, we believe A-B shareholders may be best served by A-B sitting still, at least for now, while SAB undertakes to complete a hostile takeover of Harbin," he said.
"Doing so may result in Harbin going to SAB, but the aftermath may prove a boon for A-B in that the transaction is hardly cheap and SAB is evidently intent on integrating Harbin with its China Resources Breweries joint venture, in spite of historical and increasing tensions between the managements of Harbin and CRC."
He added: "Moreover, A-B may still acquire control of Harbin at a full but digestable price. A full-out PR campaign in favour of A-B and against SAB's offer is under way with Harbin's CEO at the forefront. Targeted constituents are not only a public who may be wary of a hostile acquisition from a foreign entity but also regulators who may be troubled by a Harbin-CRC combination that would have as much as 60% of Northeast China's beer market."
A-B, then, may yet pick up the pieces in this latest clash between the world's two beer behemoths.
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