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Heineken takes on AB InBev in China with $3bn deal

The move gives Heineken a local foothold and distribution network in a market that’s embracing more exclusive drinks.

Heineken is buying a $3.1 billion stake in China’s top beer maker — the country’s biggest brewery deal — as it seeks to unseat rival Anheuser-Busch InBev in a fiercely competitive market.

The Dutch brewer will pay HK$24.4 billion for a 40% stake in the parent of China Resources Beer, maker of the country’s best-selling Snow brand. The move gives Heineken a local foothold and distribution network in a market that’s embracing more exclusive drinks, but has proved challenging for foreign players from Asahi to Carlsberg A/S.

The world’s largest beer market, China has seen intense competition as drinkers with rising incomes look to switch to more expensive and imported beverages. While the country is still dominated by affordable Chinese brews, costlier options are expected to expand the market by 21% to $106 billion in just four years.

China Resources Beer’s success in creating a national brand in Snow is “a little bit like what Budweiser did in its glorious times in the US,” Heineken Chief Executive Officer Jean-Francois van Boxmeer said on a call with reporters.

The Dutch brewer is paying an implied price of HK$36.31 a share of the listed entity, a premium of 2.4% above its Thursday closing price. China Resources Beer shares fell as much as 2.7% in Hong Kong, trimming their gain for the year to 24%, while Heineken rose as much as 1.7% in Amsterdam early Friday.

The deal promises to give Heineken access to its Chinese partner’s extensive distribution to catch up to rivals.

“It’s impossible that Heineken can grab a significant larger market share in China by itself,” said Barney Wu, an analyst at Guotai Junan. “It has missed the chance as other international rivals such as AB InBev have become strong market leaders in the market.”

Source: Euromonitor

Heineken’s operations in the country will be combined with those of China Resources Beer, and the Dutch brewer will license its brand to the Chinese partner on a long-term basis, according to company statements. China Resources Beer’s parent company will acquire Heineken shares worth about 464 million euros ($538 million). The Dutch company will make its global distribution channels available to China Resources’ brands including Snow.

Foreign hurdles

The trend toward upmarket brews should benefit foreign producers whose beers are seen as higher quality, but many have struggled to increase their share in a market where a vast nationwide distribution network takes years to build. Japan’s Asahi sold out of its stake in China’s Tsingtao Brewery in December after failing to gain traction for its top-selling “Super Dry” brand, while Carlsberg has relied on its control of a local brewer, Chongqing Brewery, to build up a presence largely confined to China’s western region. The Danish company has about 5% market share overall.

The deal offers China Resources Beer opportunities for both the Snow and Heineken brands. Chief Executive Officer Hou Xiaohai said the company aims to move the Snow brands upmarket, while building Heineken into the No. 1 brand in China’s high-end market.

“The premium market is the important battle field for brewers to win in China,” said Hou in a conference call Friday. “The mission is clear, but it’s also facing many challenges.”

Craft beers

Anheuser Busch, meanwhile, has steadily cornered the premium market. It’s expanded the Budweiser label while buying up local craft beer brands and aggressively marketing its Goose Island brand to fashionable millennials in China’s urban centers.

Heineken has been less successful at growing its footprint in China, with less than 0.5% of the market last year, according to Euromonitor. Its share has remained stagnant largely due to the lack of a local distribution network, said Bloomberg Intelligence analyst Shen Li.

Heineken and AB InBev are locked in battle in other emerging markets like Brazil, where the Dutch brewer’s attempt to challenge the Belgium-based leader has squeezed overall margins and led to a slide in its stock price.

The Chinese market has shrunk 7% in volume from 2012, even as it has surged 42% in value, according to 2017 data from Euromonitor International, as the rising middle class pivots toward higher-quality, often imported or foreign-made, goods.

China Resources has been rolling out pricier offerings at higher prices in an attempt to ignite growth. But its core reputation for cheap beers is hampering that effort, said Guotai Junan’s Wu.

“I’m surprised China Resources is willing to sacrifice so much of its shares to get Heineken,” Wu said. “It shows the market leader in China is quite concerned about competition with AB InBev.”

China Resources Beer is working with Nomura Holdings Inc. and UBS Group, according to regulatory filings. JPMorgan Chase & Co. is acting as sole financial adviser to Heineken, people with knowledge of the matter said, asking not to be identified because the information is private.

© 2018 Bloomberg
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