Drunken advances?

Diageo wants to add premium Chinese liquor brand to its portfolio

Drunken advances?

Made in China, owned by Britain?

British drinks maker Diageo says its strategy is to be a “total beverage alcohol” company, one that sells all kinds of drinks, from spirits to wine and beer. This month, the world’s largest spirits company took one step closer to realising its goal.

Diageo, owner of Johnnie Walker, Smirnoff and Guinness, now wants to add Chinese white spirits, or baijiu, to its stable of products. Early this month, it announced that it might spend $907 million to take over China’s premium baijiu-maker Sichuan Shui Jing Fang.

A potent mash of sorghum, rice, barley and other grains, baijiu traces its lineage back to the 14th century, a few hundred years before the famous Scottish whisky makers got started. Though some say it tastes like a mixture of tequila and dirt, the white spirit accounts for about half the nation’s alcoholic-beverage consumption. In contrast, the combined consumption of all foreign spirits is estimated at less than 1% of the total.

The allure of such a large market has convinced Diageo that it needs to adjust its portfolio. Under a complex deal, the UK distiller, which already owns a 49% stake in Shui Jing Fang through a holding company called Chengdu Quanxing, will raise its stake by 4%, to a total of 53%.

If approved by the Chinese authorities Diageo would be required under Chinese takeover rules to bid for the rest of Shui Jing Fang, potentially giving Diageo direct majority ownership of the Shanghai-listed drinks maker, says the 21CN Business Herald.

Shui Jing Fang is the fourth-largest producer of premium baijiu in China, behind more familiar names like Kweichow Moutai and Wuliangye (see WiC7). In 2008, Shui Jing Fang reported net sales of about $171 million.

“Diageo [will be] the only global company participating on this scale in Chinese white spirits,” Gilbert Ghostine, Diageo’s Asia-Pacific president, told the Financial Times.

The deal also fits with Diageo’s increasing efforts to shift its focus to developing markets like China to boost sales. Sales for super-premium baijiu – a segment Shui Jing Fang now leads – have skyrocketed.

“The transaction provides Diageo with the platform to participate at scale and grow share in the largest, most profitable and fastest growing spirits segment in China: super-premium Chinese white spirits,” Diageo’s chief executive, Paul Walsh, said in a statement.

But some are sceptical that the deal will go through. In the past, foreign firms have been barred from acquiring renowned Chinese beverage brands. Readers of WiC will remember that a year ago, Chinese authorities cited anti-monopoly concerns in rejecting a $2.4 billion bid by Coca-Cola to buy privately-owned Huiyuan Juice. The rejection was widely seen as a protectionist measure designed to keep well-known mainland assets out of foreign hands (see Talking Point, WiC 7).

But Ghostine isn’t worried.

“We don’t believe there will be any antitrust issue on this deal. This is a completely different situation,” says Ghostine. “We have the support of the Sichuan government for this initiative.”

Moreover, Diageo boasts some serious connections. China Investment Corp, the country’s $200 billion sovereign wealth fund, is a shareholder. Last year, CIC acquired a 1.1% stake in the firm (see WiC26).

New Century Weekly also thinks the prospects for a successful acquisition are favourable. Despite being the world’s largest spirits category by volume, baijiu is largely unknown outside of China. Shui Jing Fang needs Diageo’s extensive sales network and marketing abilities to popularise Chinese liquor abroad.

But Paul French, China analyst at research firm Access Asia, thinks that even Diageo may find that a tough sell. “[Baijiu] is like Chinese opera,” he says. “Let’s be honest. Even if you live here and love China, you really can’t take more than five minutes of the stuff.”

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.