Carlsberg announced last week that its joint venture with the Khun Charoen/Chang Beverages group had collapsed leaving the Danish company as 100%-owners of Carlsberg Asia and its plans for Asian growth little advanced from two and half years ago. Ben Cooper looks at Carlsberg’s doomed relationship with Chang and asks where the brewer goes from here.
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The collapse last week of the Carlsberg Asia joint venture between Carlsberg and Chang Beverages has once again illustrated the risks established western companies take when partnering with local firms in emerging markets.
Carlsberg announced that negotiations had failed to bring the parties closer together and that the relationship was no longer viable. While the precise details of the disagreement are yet to be clarified, they centre on Chang’s failure to contribute sufficient assets to the joint venture, the creation of which was originally announced in December 2000. Carlsberg Asia is therefore to remain a 100%-owned subsidiary of Carlsberg Breweries.
“We have terminated the joint venture amongst other things because we are under the distinct impression that the character of the companies which Chang Beverages was to transfer to Carlsberg Asia does not correspond with what was agreed upon,” said Carlsberg’s president and CEO, Nils Smedagaard Andersen, “and that the value of these is disproportionate to the assets which Carlsberg Breweries has transferred to Carlsberg Asia,”
Andersen added: “Carlsberg Breweries has spent much time and many resources trying to establish a dialogue with Chang Beverages. However, the management of Carlsberg Breweries no longer believes that it is possible to establish a constructive cooperation on a reasonable basis.”
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By GlobalDataThe market reaction to Carlsberg’s Asian problems has so far been fairly minimal. There has been no discernible impact on the company’s share price and analysts on the whole have been muted in any criticism of the Carlsberg management. The company, after all, is not the first, nor will it be the last, to have its fingers burned when going into partnership with a local company in an emerging market. In offering the necessary scale and local knowledge such partnerships are seen as potentially highly beneficial, if not vital, but they are never risk-free.
However, part of the reason why Carlsberg has not suffered a worse backlash is because its exposure to the region is so small. According to the market analysts, Canadean, the company’s total Asian business accounts for about13% of total earnings and Carlsberg estimates that 80% of its profitability in this market is generated from its Malaysian holding. But ironically one reason why the company’s exposure is not greater is due in part to the failure of the Carlsberg Asia venture to take the company forward in the region. In fact, in many ways the collaboration never really got off the ground.
“When the creation of Carlsberg Asia was announced, Carlsberg was very positive about the future in Asia,” Ulla Mouritsen, analyst at the Danish Jyske Bank, told Just-drinks. “After that we have just seen one disappointment after another.”
Mouritsen explained that the company had had difficulties almost from the outset integrating with Chang in Thailand and that growth forecasts for Carlsberg Asia had had to be continually downgraded.
Now that the joint venture has foundered, there is a temptation to be wise after the event but Mouritsen was quick to point out that at the time of its formation most observers believed Carlsberg had chosen wisely and its strategy for the region augured well. “In general, it was thought to be a good move,” Mouritsen said. “It sounded very good at the time. We can see now it was too optimistic.”
Carlsberg even seems to have escaped serious criticism for not being more forthcoming with the market about the difficulties it was experiencing with the joint venture. It was generally known that the integration and co-operation were not going well but the brewer appears to have held off from making any statement on this to shareholders for some time.
According to a report in the Jyllands-Posten in July, the brewer withheld information about the problems in its Asian joint venture from the Copenhagen Stock Exchange (CSE) and its shareholders for three months. It did not disclose that it had removed Chang Beverages representatives from the Carlsberg Asia board until the 23 June but in fact had made the changes on 19 March. And there was nothing in the brewer’s first-quarter results suggesting major problems with Carlsberg Asia.
Carlsberg spokesperson, Margrethe Skov, said that the company did not usually brief the CSE about changes in the company’s subsidiaries and that it was simply following its usual practice. Some might have argued, however, that these were rather special circumstances which might have demanded a departure from its usual practice. Skov said when it became clear that Chang would not be contributing its assets by 1 July – 30 June 2003 was the deadline set for this when the venture was set up – Carlsberg made a statement to the CSE.
Interestingly, even though the joint venture never actually became fully consummated because of Chang’s tardiness in contributing assets, the split may be complicated by Chang claiming rights to the few acquisitions which Carlsberg Asia made since it officially became a joint venture. Among these is the Laos state-owned brewer, Lao Brewery, which was acquired jointly by Carlsberg Asia and Thai Charoen Commercial Group (TCC), during 2002. According to Canadean, each company acquired a 25% stake in the brewer.
There were also two acquisitions in China during the term of the joint venture, Dali Beer and Kunming Huashi Brewery Company, both located in the Yunnan province. In June 2003, Carlsberg announced that it had acquired 100% of Dali Beer through Carlsberg Asia. Although this deal was completed when the joint venture was technically still in operation Margrethe Skov stressed that as Chang had not put any assets into the joint venture, Carlsberg’s complete ownership of Dali could not be brought into question.
The situation with the other Chinese brewer acquired during the time of the joint venture, and another Chinese brewer acquired before the joint venture took effect, bear more similarity to the Laos situation. The Kunming Huashi Brewery Company, acquired in January 2003, and the Carlsberg Brewery (Guangdong), bought in 1995, were acquired through Carlsberg Brewery Hong Kong which is 51% owned by Carlsberg with Khun/Charoen controlling the remaining 49%.
“At this time we don’t know exactly what will happen but we have a majority ownership,” Margrethe Skov told Just-drinks.”They were bought through Carlsberg Hong Kong.” However, Skov conceded that these two breweries may come into future negotiations regarding the termination of the joint venture but as yet Carlsberg had not had any reaction from Chang Beverages, something which had surprised the Danish company. “It is surprising but we don’t know what the reaction will be.”
Carlsberg also announced in July 2002 that it would be producing the Chang beer brand in Malaysia under licence. The licensing deal is still ongoing and is scheduled to continue until 2012. Skov said she could not say at this stage how that issue would be resolved but it is also likely to come into the negotiations.
So far, Chang Beverages and its owner, the Thai liquor magnate, Charoen Sirivadhanabhakdi, have kept their own counsel on the split. But the Thai company will naturally want to ensure the most beneficial exit from the joint venture as it can. And as one analyst pointed out: “Chang does not have much to lose so they will go for whatever they can get.”
Even if Carlsberg can extricate itself from Chang with relative ease and the minimum of acrimony, the question of where recent events leave the company’s Far Eastern expansion strategy remains.
Having failed with a strategic partnership, it is clear that another joint venture is rather unlikely. It would appear that the company is looking to take a more acquisitive route to expansion in the region but some observers remain sceptical about Carlsberg’s ability to carry this off.
Carlsberg’s CEO, Nils Smedegaard Andersen, was quoted in the daily newspaper, Boersen, as saying: “As in other core regions we are now looking at possible companies to acquire,” adding that the company had capital reserves of around DKr20 billion to invest in possible acquisitions.
Mouritsen believes that the company may opt for a series of smaller acquisitions given that the larger prime takeover targets would be expensive with their value driven up by interest from other major brewers. However, without a major strategic partner, Mouritsen said she remained unconvinced that Carlsberg could progress substantially in Asia. “I think that what they will do is go for small takeovers and try to buy small breweries but I have my doubts about whether they will be very successful in Asia.”
Clearly, Carlsberg has some convincing to do, particularly in certain quarters. While not hugely material to the company’s bottom-line the failure of the Carlsberg Asia joint venture has raised some questions concerning the company’s choice of strategy in the region. In comparison with many, Carlsberg has traditionally been more open to the idea of joint ventures – and has had some successful strategic tie-ups over the years. It will be interesting to see if the Chang debacle leads to a general revision of this policy.
