Chris Mercer

Comment - Kingway Brewery Gets Pick of the Bunch

By Chris Mercer | 14 February 2012

Kingway's controlling shareholder, state-owned GDH, is set to profit from growing rivalry among multinational brewers in China. 

After GDH vetoed SABMiller and China Resources Enterprise from taking over Asia Pacific Breweries' 21.7% stake in Kingway Brewery last year, I remember someone with knowledge of the process suggesting to me that GDH was merely playing for time. It's not that the state-owned enterprise didn't want foreign investment, it's that it was eyeing opportunities to get a better price.

Perhaps what GDH didn't allow for was the subsequent decline in Kingway's share price through the latter months of 2011. But, this Valentine's Day, Kingway's shares rose by 10.5% on the Hong Kong stock exchange as GDH looks to have its pick of suitors for the brewer's assets. Shares are up 35% so far in 2012. 

Officially, of course, none of the prospective bidders is talking. But, there is interest from SABMiller's JV, CR Snow, and also reportedly from Anheuser-Busch InBev and from Tsingtao Brewery. Carlsberg is the latest name to be thrown into the hat, after its own CEO, Jorgen Buhl Rasmussen, said again in an interview that the Danish brewer wants acquisitions in Asia. With Western Europe tanking and Russia mired in tax rises, it's easy to see why.

It's also easy to see why Kingway is attractive. It is a publicly-listed stock in a Chinese market that, some analysts believe, already has thinning opportunities for large-scale consolidation. This is particularly true in the most affluent provinces and Kingway's Guangdong is one of the most affluent around.

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To use a hackneyed phrase in the drinks industry, a deal for Kingway could be game-changing for a number of brewers in Guangdong province. According to analysis published last week by Sanford Bernstein, a takeover of Kingway would give A-B InBev outright leadership of the province's beer market. Kingway has a 9% volume share, with A-B InBev level with Zhujiang on 20%.

However, SABMiller has a small footprint in Guangdong, with only a 5% volume share, hence its interest last year in using Kingway to catch up with rivals. This interest likely remains.

Who, then, might be best-placed to seal a deal? If it comes down to money, Carlsberg could struggle, despite its need to build a stronger presence in China generally. "They might get involved, but I'd be surprised if they can match what A-B InBev or SABMiller can offer given their scale and in-market synergies," one analyst told just-drinks.

Separately, Morgan Stanley analysts said in a note this week that Kingway as a whole could fetch US$800m, based on what GDH bought APB's stake for last year. However, this would be an extremely high valuation as deals in the brewing industry go; the final price could be lower considering Kingway's weak finances.

Still, Morgan Stanley analysts argued: "While this is expensive, we do not think it would be enough to compromise A-B InBev's higher shareholder payout in 2012 and beyond." Synergies and an opportunity to increase profitability in one section of a notoriously low-profit Chinese market might justify the high price tag, the analysts speculated.

"Investing in China is a strategic necessity that requires investors' patience," they added.

For GDH, its own patience looks set to pay off. 

Expert analysis

Beer Market in China to 2014 (Beer, Cider and FABs)

Beer Market in China to 2014 (Beer, Cider and FABs) is a comprehensive resource for market and segment level data including value and volume from 2004 to 2014, and market/company shares for 2008-09.This report also provides data on expenditure and consumption as well as key distribution channels, and reveals the leading companies in the Chinese beer market.

Sectors: Beer & cider, Mergers & acquisitions

Companies: SABMiller, InBev, Carlsberg, Tsingtao

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