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) has picked up a 21 percent chunk of Guangdong Brewery while Belgium's Interbrew (IBRWF) gained control of a Malaysian beer firm's Chinese operations. Carlsberg, Scottish and Newcastle, Japan's Kirin (KNBWY) and Diageo (DEO) are also moving in on the market.

But it is the expected battle over Harbin Brewery between Anheuser-Busch (BUD) and SABMiller (UK:SAB) 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."

William Spain is a reporter for CBS.MarketWatch.com in Chicago.