Lower Threshold Makes Beer Acquisition Possible

The new policies about foreign investment in China provide the foreign investors with open access to acquisitions in different industries, especially in the beer industry.

In April China’s State Council, or Cabinet, issued the “Several Opinions of the State Council on Further Utilizing Foreign Capital” (hereafter the Opinions), stating clearly that “the foreign investors are encouraged to attend the restructurings and reorganization of Chinese enterprises through buying stocks and mergers”.

Soon after the issuance of the Opinions, a case in China’s beer industry triggered people’s interest. The established foreign beer makers, including Anheuser-Busch InBev (AB-InBev) and Carlsberg, and the Chinese domestic beer brewer – China Resources Breweries Co., Ltd. – tendered for the 12.25% shares of Chongqing Beer held by state-owned Chongqing Beer Group.

Some experts think that Carlsberg is most likely to win the bidding among the three companies. For Chongqing Beer Group, being acquired seems to be its only way of surviving.

Giants’ Duels in Southwest China

In April, Chongqing Beer Group declared the willing to transfer the 12.25% shares of Chongqing Beer through tendering. The declaration attracted many established beer brewers. On April 29, Chongqing Beer Group announced that three companies – AB-InBev, Carlsberg and China Resources Breweries Co., Ltd. had submitted the bidding documents and related materials by April 28 – the deadline Chongqing Beer Group set for the tendering.

According to the official information, the majority shareholder of Chongqing Beer is Chongqing Beer Group with 32.25% shares. The second largest shareholder is Carlsberg with 17.46% shares. The source said that Chongqing Beer’s appeal for the three giants is on the one hand attributed to its good performance and great market share in Chongqing. On the other hand, it explains the fact that the leading beer manufacturers have attached great importance to Southwest China.

According to the 2009 financial report of Chongqing Beer Group, its Chongqing Beer section saw 1 million kiloliters of beer sold and the operating income of 2.26 billion yuan (USD 330.9 million). It plans to sell 1.12 million kiloliters of beer in 2010 and increase its operating income to 2.586 billion yuan (USD 378.7 million). Meanwhile, Chongqing Beer took control of 80% of the beer market in Chongqing.

According to China Investment Consultant Center’s “Prospect Report and Investment Analysis on China’s Beer Industry from 2010 to 2015”, numerous significant changes happened to the beer market of Southwest China. Apart from the frequent investments of foreign beer giants, the domestic enterprises, like China Resources Breweries Co., Ltd., Tsingtao Beer and so on, are all actively involved in the beer market there.

The international beer giant AB-InBev set its foot in Ziyang, Sichuan, in the middle of April, planning to invest 650 million yuan (USD 95.2 million) in building its first beer-making base in Southwest China. The base will cover 136 thousand square meters and the production capacity will reach 300 thousand tons. The construction will be finished by June 2011. The main products are the Budweiser Beer and Harbin Beer.

Zhou Siran, a researcher from China Investment Consultant Center, pointed out that AB-InBev’s establishment in Ziyang, Sichuan is closely related with its bidding for the 12.25% shares of Chongqing Beer, whose dominant place in Chongqing’s beer market will facilitate AB-InBev’s entry into Southwest China. This Belgium-based company also showed its resolution to build reputation in this promising land.

Another international beer giant, Carlsberg from Denmark viewed taking Southwest China as one of its core strategies in 2003 and completed several mergers and acquisitions according to the strategy. At the beginning of 2003, Carlsberg acquired all the shares of Kunming Huashi Beer. In June 2003, it acquired Dali Beer Group. In 2008, Carlsberg and Heineken acquired Scotland-based Newcastle Beer, enabling Carlsberg to have 17.46% shares of Chongqing Beer previously owned by Newcastle Beer.

Another competent bidder China Resources Breweries Co., Ltd. will not give up this opportunity easily either. “The market of Southwest China is as important as the Northeast China for us,” said Han Xiaofei, PR manager of China Resources Breweries Co., Ltd. In 2007, the company accelerated its integration pace in West and Southwest China by acquiring Sichuan-based Lanjian Beer. In 2009, China Resources Breweries Co., Ltd. Took 70% of the beer market in Sichuan. Its distribution networks has covered Sichuan, Chongqing, Guizhou and Yunnan.

Carlsberg to Be the Winner

China’s beer industry saw frequent foreign investors’ acquiring Chinese beer makers in recent years. In the first quarter of this year, there were nine such cases with total value of 400 million US dollars. “The integration of regional brands is inevitable. The only difference is that the integration is done by Chinese or foreigners,” said Zhu Huang, who has observed China’s beer industry for a long time. “The regional brands, like Chongqing Beer, can’s stand firmly in the future competition due to its size and brand, which absolutely determines the development of a beer company.”

No results about who will win the bid for Chongqing Beer have been gained. In some experts’ opinions, the company which can get the 12.25% shares of Chongqing Beer can see an obvious upgrade of position in Southwest China’s beer market. “Carlsberg is the second largest shareholder of Chongqing Beer and it will be the majority shareholder if it wins the bid. China Resources Breweries Co., Ltd., which has benefited a lot from the acquisition of Lanjian Beer, can dominate Southwest China’s beer market if it is the winner. For AB-InBev, the successful bidding means lower threshold to enter in this market,” said Zhou Siran.

The actuality tells us that there are many positive factors for Carlsberg. The second largest shareholder of Chongqing Beer has the priority to buy the shares of Chongqing Beer.

In 2005, Newcastle Beer bought 50 million shares of Chongqing Beer with 525 million yuan (USD 76.9 million), making it the second largest shareholder of Chongqing Beer with 17.46% shares. When completing the deal, Newcastle Beer agreed with Chongqing Beer Group that the latter could not find another foreign investor for Chongqing Beer and both parties have the preemption if one side decides to sell its shares. In addition, the share of foreign investor is capped below 25%.

In March 2008, Carlsberg acquired Newcastle Beer with the help of Heineken and won the 17.46% shares of Chongqing Beer, as well as the obligations and rights stipulated in the agreements between Newcastle Beer and Chongqing Beer Group. Therefore, Carlsberg is very likely to have the priority in buying shares of Chongqing Beer.

However, Chongqing Beer Group’s secretary of directorate gave out no confirmation for the inference. He said: “I don’t recall that we’ve reached this agreement with Carlsberg. However, Carlsberg is indeed one of the most competitive bidders.”

In addition to the so-called “priority”, Carlsberg has other unparalleled advantages in the three-part duel. The senior executives of Carlsberg China have close relationship with the Chongqing municipal government. In September 2009, Chongqing government invited Carlsberg CEO Jorgen Buhl Rasmussen and the other multinationals’ executives to attend the Fourth Annual Conference of Chongqing International Economic Consultancies. During the meeting Jorgen Buhl Rasmussen said that Carlsberg will move the headquarters of its China branch to Chongqing in the future.

When interviewed by local media, Rasmussen also stressed that Carlsberg, as the second largest shareholder of Chongqing Beer, has no conflict with the domestic beer brands. “Carlsberg has no will to eliminate its Chinese peers; instead, it wants to cooperate with them and learn from them.” This idea matches Chongqing Beer Group’s thought of “improving Chongqing Beer”.

If Carlsberg wins the bid, it will hold 29.71% shares of Chongqing Beer, higher than the cap of 25% stipulated in previous agreement. Here the newly issued Opinions can function by clearing this obstacle for Carlsberg.