China Consumer

Get the beers in

European brewer doubles down in Chongqing coup

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Carlsberg is set to take control of its Chinese brewery

When Steven Gerrard and his fellow Liverpool players ran out to face Chelsea in the English Premier League in May 2010, fans spotted something different about their shirts. The sponsor’s name was in Chinese.

Turns out it was Carlsberg’s last match sponsoring the club after an 18-year association, so the Danish brewer decided to do something pioneering by putting Chinese characters on the club’s famed red shirts. Their meaning was a mystery to the largely monolingual Anfield crowd, but they were fairly familiar to fans watching from China: ‘Jia-shi-bo’, or Carlsberg’s name in Mandarin.

The gimmick spoke volumes about the growing importance of the Chinese beer drinker.

Earlier this month Carlsberg again flagged its enthusiasm for the world’s second biggest economy with a bid for Chongqing Brewery. It’s a move that 21CN Business Herald says could lead to China’s largest ever brewery takeover by a foreign company.

Carlsberg already owns 29.5% of the beermaker but is seeking to raise its stake to 60% through a tender offer for 146 million shares. Should it be fully subscribed, the bid will cost the multinational Rmb2.92 billion ($479 million).

The tender looks likely to succeed for two reasons. The first is that state-owned Chongqing Beer Group plans to sell its remaining 20% stake in Chongqing Brewery and exit via the Carlsberg offer. And since Chongqing Brewery’s stock is also trading below the tender price, an analyst with Hualong Securities told China Times that smaller shareholders will sell to the Danes too.

Carlsberg’s involvement in Chongqing Brewery dates back to 2008 when it acquired Scottish & Newcastle (owner of a 17.5% stake since 2004). It’s been a bit of a tumultuous ride in share price terms. As regular readers will recall, Chongqing Brewery grabbed headlines a couple of years ago when speculative buying saw its stock surge to a peak of Rmb83. A surge in beer sales, you ask? No, it was driven by news that one of its subsidiaries was about to get approval for a new hepatitis B vaccine. When management revealed that clinical trials had actually failed, it caused an outcry and the shares plunged (see WiC134).

Since then the company has gone back to the basics of making beer. But in a measure of how far the stock has plummeted, Carlsberg’s current tender is priced at Rmb20 a share.

Even at that price it is a bold move – valuing the targeted stake at close to 45 times earnings, a multiple more normally associated with social media stocks than brewers.

Can it be justified by the double-digit growth in Chinese beer consumption? Carlsberg’s results from last year revealed slower revenue growth of 5% in China (with a large proportion of that derived from sales at Chongqing Brewery). Indeed, Carlsberg’s shareholders may question whether the company has overpaid in its bid to grow its Chinese presence. The current valuation is rich, but an earlier transaction merits attention. In 2010 it also bought a stake in Chongqing Brewery (paying Rmb2.38 billion for 12.25% ). It did so at a price of Rmb40.22 a share, i.e. double what it is offering in the current tender.

But with growth in its mature markets anaemic, Carlsberg’s strategists may have concluded that China still remains the best place to bet big. And the current move can be rationalised as a step towards consolidating its brewing assets in western China. Aside from Chongqing it has operations in Yunnan, Gansu, Qinghai, Tibet, Xinjiang, and Ningxia.

These frontier markets all offer higher potential growth than the more saturated coastal provinces, say analysts. And as one insider told 21CN: “Carlsberg will locate its China regional headquarters in Chongqing and turn it into a production and logistics centre for China, and use it to actively expand in the western Chinese market.”

Carlsberg needed to do something, as it is unquestionably playing catch-up in China. The country’s market leader is CR Snow, the joint venture between China Resources and SABMiller, which controls about 22% of the market. The number two and three spot are held by local players Tsingtao and Beijing Yanjing (with 15.7% and 11.7% respectively). Carlsberg comes a distant sixth, with 2.6% according to Euromonitor.

To put those relative positions in further perspective: Chongqing Brewery has a production capacity of just over 10 million hectolitres; CR Snow can brew about 185 million hectolitres.

But 21CN reckons another deal could be in the offing to further boost the Dane’s volumes. Once the tender is complete, the newspaper cites sources as saying Carlsberg will then negotiate to buy Chongqing Beer Group’s remaining breweries in China (it has 9). There is both a logic and a necessity to doing this. Chongqing Brewery’s main brand is Shancheng Beer – but (confusingly) Chongqing Beer also uses that name. So if Carlsberg wants to be the sole maker of Shangcheng Beer, acquiring Chongqing Beer’s remaining breweries makes sense.

However, Carlsberg’s current M&A moves may be part of a bigger gambit.

Last week Bloomberg reported that Carlsberg might be considering a takeover of either Tsingtao or Yanjing.

Either deal would be transformational, and Bloomberg reckons a major merger is now a possibility. That’s because the Carlsberg Foundation has dropped a longstanding requirement that it hold at least 25% of the Danish firm. As a result Carlsberg’s stock can now be used to fund big acquisitions.

Absorbing 110 year-old Tsingtao would be tough given its roughly $10 billion market value. Plus rival Japanese brewer Asahi owns a 19.99% stake. Yanjing looks the more plausible candidate, but Chinese beer industry experts say its bosses have long resisted M&A approaches.

Another outcome might be for Carlsberg to trade its reorganised and relatively attractive western brewing assets for a minority stake in Yanjing. That would give it a shareholding in a far larger combined entity (though not control).

What has become evident in recent weeks is that world’s fourth largest brewer is intent on doubling-down on its investment in China. But whether it will garner the growth and the returns Copenhagen desires is far from clear. Moreover there is even a concern over whether it can defend what it already has.

Beverage Daily, a website, points out that Chongqing Brewery has a market share of around 80% in its home area (i.e. Chongqing municipality, a territory with 30 million people). But after Chongqing Beer Group exits the business, will that near monopoly position be under threat? The old shareholding structure had a benefit: Carlsberg was ultimately working in partnership with the local government (since it controls Chongqing Beer). Officialdom had a vested interest in Chongqingers drinking their beer rather than those made elsewhere.

With this financial incentive gone, will the local government care as much about protecting Chongqing Brewery’s market share? Or might ‘Fortress’ Chongqing soon become an easier market for Carlsberg’s rivals to operate in?

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