MBA 2004

What's at stake in Harbin battle
SABMiller, A-B fight over China's fourth largest brewer

By William Spain, CBS.MarketWatch.com
Last Update: 6:33 PM ET May 28, 2004

CHICAGO (CBS.MW) -- As the summer beer-drinking season kicks off this weekend, brewers are using everything from gentle persuasion to ham-fisted pressure to charitable donations in an all-out attempt to reach the thirsty millions.

Since the beginning of the year, the fight for a share of the world's second largest beer market has turned into a free-for-all. Heineken (HINKY: news, chart, profile) has picked up a 21 percent chunk of Guangdong Brewery while Belgium's Interbrew (IBRWF: news, chart, profile) gained control of a Malaysian beer firm's Chinese operations. Carlsberg, Scottish and Newcastle, Japan's Kirin (KNBWY: news, chart, profile) and Diageo (DEO: news, chart, profile) are also moving in on the market.

But it is the expected battle over Harbin Brewery between Anheuser-Busch (BUD: news, chart, profile) and SABMiller (UK:SAB: news, chart, profile) that is currently at the top of the card. The prize is China's fourth-largest brewer, and if it ain't exactly the beer that made Heilongjiang famous, it has a good reputation for quality and a dominant market share in the northeast of the country - apparently enough to set the world's top two beer companies at each others' throats.

SABMiller already had just over 29 percent of Harbin when Anheuser-Busch announced earlier this year that it had cut a deal to buy 29 percent of the company for $139 million through the purchase of an investment holding company. It bought its stake for 47.5 cents per share and closed the purchase last week.

That move prompted SABMiller on Monday to launch a hostile takeover bid for the rest of Harbin at $550 million, or 55 cents per share -- a whopping 38 times 2003 earnings. While Anheuser-Busch has yet to top that offer, it hasn't sat on its heels, either. On Tuesday, it said it will pony up $8 million to a fund to "create economic development opportunities" for the local citizenry.

Both companies already have a significant presence in China. Anheuser-Busch has a 27-percent stake in Tsingtao, China's most popular beer maker. And SAB Miller has 49 percent of China Resources Breweries, which it has said it would try to integrate with Harbin if its takeover is successful.

While Anheuser-Busch clearly wants a shot at the whole shebang, even if it loses, it stands to make a tidy profit on its stake in Harbin - at its rival's expense. SABMiller has less wiggle room.

"If they were to lose this battle, they would be way behind," said Hayes Miller, senior vice-president for global equities at Baring Asset Management, which is a holder of SABMiller shares.

Winning control of Harbin is key to the company's efforts to keep up with Anheuser-Busch, he added. "The key for SAB is to gain a distribution network. The promise is so great that you have to pay a premium to get the one or two key assets that are necessary."

Both companies have enormous assets to throw into the fray. SABMiller's revenue was $12.6 billion in its latest fiscal year. Anheuser-Busch's came in at $14.1 billion. And shares of both have been trading at or near 52-week highs.

So how big is the prize?

In a word, "colossal," said Tom Pirko, president of consultancy BevMark. "The potential market in China is almost unlimited."

Pirko, who rarely shies away from pointing out overexuberance in the beverage industry, is unabashedly enthusiastic about the nation's prospects.

"We have absolutely no doubt that there are fabulous opportunities there," he said. The country's economy is "hyper-leaping; a whole new class of consumers is rising."

And they do like their suds. See sidebar on China beer drinkers.

China produced an estimated 238 million hectoliters (6.3 billion gallons) of beer in 2002, second behind the 241 million (6.4 billion gallons) made in the U.S. And it is widely thought to have jumped into the number one spot since. The dollar value of the market is estimated at about $6.2 billion.

More to the point, between 1997 and 2002, Chinese consumption grew at an average annual growth rate of 4.9 percent, compared to a slack 1.3 percent in the U.S. Among the top 11 global beer markets, only Russia and Poland have faster growth rates -- and those are on volumes mere fractions of what the leaders have.

So with slowing growth expected in the U.S., coupled with declines in other top markets like Germany, the U.K., Japan and South Africa, the scramble for China begins to look more like a matter of survival than an interesting opportunity.

However, it is not easy sailing. Many brewers learned this to their cost in the 1990s when hundreds of millions of dollars in investment took most of them exactly nowhere.

But the market has grown exponentially more attractive ever since as rising incomes hold out the promise for per-capita increases in consumption. In China, beer is still fairly expensive. According to Worldbank Statistics, on a purchasing power parity (PPP) basis, in 2002 a bottle of premium brew cost the average Chinese worker the equivalent of $4.75; a mid-range brand went for $2.38; and the bottom-shelf swill was $1.43.

However, the same study pointed out that in booming Shanghai, where wages tend to be higher, the PPP-adjusted figures were cut roughly in half.

Quality standards still lag behind the U.S. and Europe, Miller noted, and it can be difficult to "navigate your way through the labyrinth of the compliance and regulatory side."

Accounting "can be much less transparent, although the Chinese understand that for certain deals it benefits them to be open," he said. "There is plenty of room for lots of players to be in that market. They just need the proper infrastructure to conduct business."

Beer in China.
SHANGHAI (XFN) - The tug-of-war between SABMiller and Anheuser-Busch over China's Harbin Brewery, its fourth largest, has once again thrown the spotlight on quenching the growing Chinese thirst for a cool one.
This time around it's quite different from the 1990s, when the world's beer giants showed up with dreams of 1.3 billion Chinese reaching for a Bud. Those dreams soon evaporated, as the big players discovered a Chinese tendency to look at the price tag before the label on the bottle.

But it's easy to see the attractions of the Chinese beer market. As household incomes rise and people move into the cities by the millions, there's a growing demand for a glass of suds.

"I'm really getting into having a beer with lunch or dinner and when we go to parties now with friends, we're served beer instead of the cola or juices that we used to get," says Zhang Yi, a 24-year old Shanghai-based financial analyst, before adding that he favors Chinese brands because of the price.?

Growth business

Chinese per capita consumption of beer is about 20 quarts a year. By comparison, Europeans slurp down about 80 quarts a year, and Americans put away about 89 quarts.

But while growth in developed markets is stagnating, China's beer consumption is estimated to be growing at between 6 percent and 9 percent a year. And there's plenty of room for growth. With sales of about $6 billion last year, Chinese consumption is expected to overtake the U.S. - the current global leader - in a few years.

"It's one of the few markets that's still growing as living conditions and income levels continue to improve," says Alice Hui, an analyst with DBS Vickers Securities in Hong Kong. "There's still a lot of room."

Small wonder that the failures of that first foray haven't been enough to put the breweries off. The past few years have seen them return en masse, albeit with a quieter strategy of buying stakes in the established players in the marketplace.

European firms are at the head of the pack, led by Interbrew (IBRWF: news, chart, profile), distributor of brands such as Stella Artois and Becks. In recent years, the Belgian beer giant has coughed up $600 million to buy up chunks of 17 brewers around the country.

And chairman Pierre Jean Everaert said that the company hasn't finished its shopping spree. It's still looking for acquisition targets as it goes after the market leaders, Yanjing Brewery and Tsingtao Brewery which, when it was opened by German colonialists in 1898, became the mainland's first beer maker.

"We want to be in the number one or number two position," said Everaert.

Already this year, the U.K.'s Scottish & Newcastle bought a 19.5 percent stake in a brewery in Chongqing in the southwest, while last month, Carlsberg signed an agreement to form a $34 million joint venture in Gansu province in the west.

And Anheuser-Busch (BUD: news, chart, profile) agreed last year to raise its 11-year-old holding in Tsingtao to 27 percent from 4.5 percent. It also has a 29 percent stake in Harbin, which may lead it to try to outbid SABMiller's (UK:SAB: news, chart, profile) $550 million offer for the brewery, announced last week. See full story.

Premium prices

But the Chinese market is by no means wrapped up. Although widely dispersed, the near 400 breweries in the Chinese market still compete enough with each other to see prices and margins tumbling in recent years.

Traveling from region to region, consumers are faced with a vast array of beers, from Xinjiang black beer in the far west of the country, to Shanghai's cunningly-named Reeb ("beer" spelled backwards); and from the downright unpleasant, which can go for as low as 8 cents a bottle, to Tsingtao's premium brews, which retail for about 80 cents.?

Despite shelling out hundreds of millions of dollars, Interbrew said that its market share is only 9 percent, while Tsingtao has over 12 percent and Yanjing 10 percent.

Small wonder then that foreign breweries have given up on the idea of conquering the entire market in one go - primitive distribution networks would always have hampered that strategy anyway - and are instead focusing on regional victories, with the battle for Harbin centering on the northeast.?

"That's a big difference," says DBS' Hui. "Some regions aren't ready for foreign beer."牋?

There are signs that a brutal price war of recent years is coming to an end. Though the market leaders have denied it, there have been reports of a cartel forming to push prices up by as much as 30 percent for the first time in over six years to cover rising raw materials costs.

Even without factoring in grain prices, analysts said rising prices are inevitable, as incomes increase and consumers become more discerning about the quality of the bubbles in their bottle.

?The beer industry is stabilizing," said Qu Yongxiang, an analyst with Guotai Junan Securities in Shanghai.

Although Chinese consumers had little inclination for darker, pricier brands with which foreign companies sought to conquer the market in the 1990s, there's every sign now that drinkers such as Zhang Yi may one day be willing to pour out a little more of their hard earned money for the good stuff.