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Major ownership change brewing?

China’s Anti-Monopoly Law was passed in 2008 and began to show its teeth that same year. Those with longish memories will recall that the maiden verdict – based on the new antitrust rules – involved the merger of Belgian brewer InBev with its American rival Anheuser-Busch.

To ensure the deal didn’t erode competition in the local beer market, China’s antitrust authorities barred the new entity from increasing its stakes in the Chinese brewers in which the two companies had already invested. The Ministry of Commerce (MoC) also stipulated that the merged entity, AB InBev, should not seek to buy a stake in CR Snow, a local brand controlled by state firm China Resources Enterprise (CRE) and South African brewer SABMiller.

The ruling reshaped the Chinese beer market. Another result was that AB InBev had to abandon its plans to gain control of another leading local brand, Tsingtao. Instead it offloaded its 28% stake to Japan’s Asahi and the Fujianese tycoon Chen Fashu.

SABMiller, meanwhile, was able to buy out smaller Chinese rivals and grow CR Snow into the world’s bestselling brand (in 2014 it had 5.4% of the global beer market by volume, according to research firm Plato Bernstein).

Groundbreaking changes are again expected on news that AB InBev and SABMiller have agreed (in principle) to merge. The combination of the world’s two biggest beer firms will create a mega brewer with a market value of more than $250 billion – controlling one-third of the world’s beer market. “The new company’s tentacles will stretch from Peru to China, Australia, Africa and the US and is set to take in just under half of the industry’s profit,” the Financial Times notes.

WiC has reported before on how China’s antitrust regulators have exerted a growing influence over international M&A in recent years (see WiC190). Analysts are expecting more of the same this time, particularly due to the deal’s potential impact on Chinese beer sales.

The Economic Observer notes that AB InBev has already put itself at odds with the 2008 ruling, given that a merger with SABMiller means it automatically gains a major interest in CR Snow.

“One possible scenario is that the merged entity has to sell SABMiller’s 49% stake in CR Snow to CRE, which owns the remaining 51%,” it suggests.

Such an intervention may suit CRE’s new business strategy too. The Hong Kong-listed firm sold its supermarket unit to its parent earlier this year to focus on beer (see WiC279). Investors were generally pleased with the move but analysts see a further upside if CRE is indeed able to turn CR Snow into a wholly-owned unit, as CRE is only trading at 0.8 times its book value.

In comparison Tsingtao is trading at a multiple of 2.5.

It is not a foregone conclusion that Beijing will force the sale of CR Snow. “The merged group could dispose of other smaller holdings in China, to bring its total market share down to only 30%, without touching the Snow stake,” the Financial Times reckons, citing local competition lawyers. If so, it would involve the new entity selling other domestic beer brands like Harbin, Sedrin and Double Deer (as well as getting a waiver on the 2008 ruling).

But other brewers in China have sensed that a new landscape may be imminent, with further consolidation already underway.

Japan’s Suntory Holdings said this week it will sell 50% stakes held in two of its own beer joint ventures to Tsingtao for $130 million. Despite entering China as early as 1984, Suntory only had 1.4% of the beer market last year, according to Euromonitor. This compares poorly with CR Snow’s 23%, Tsingtao’s 18.4% and AB InBev’s 14%. Hence reports in the Japanese media that Suntory will now focus largely on sales of white spirits and wine in China.

“Major brewers are getting bigger, both in the case of foreign and state firms. Life for smaller brewers will be more difficult than ever in China,” National Business Daily surmises.

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