With Anheuser Bush (AB) and SAB Miller now owning almost identical stakes in the company, the way is now clear for AB to make a counter-offer to SAB's HK$4.30 bid earlier this week for China's fourth-largest brewery.
There had originally been some doubts about the legality of AB's acquisition of its rival stake from an opportunist consortium Global Conduit Holdings, which is said to have been specifically formed for the deal from a group of Western and foreign institutional investors and hedge funds. The purchase price was HK$3.70 per share compared to an acquisition price of HK$3.25 by Global Conduit. Both are premiums to the HK$3.10 SAB Miller originally offered for the stake.
Global Conduit pulled off a coup. When it acquired the stake in February this year, market conditions were poor. It also managed to do what Harbin Brewery (HB) had failed to do and get AB interested in the deal.
The sale by the Harbin city government to the consortium represented a setback for SAB, which wanted to top up its 29% stake, acquired in 2003, to 35% and thereby trigger a general offer. That was turned down because Harbin Brewery felt its independence would be compromised by SAB's relations to China Resources Brewery, a bitter competitor in the three north-eastern provinces of Liaoning, Jilin and Heilongjiang. It owns a 49% stake.
"It's difficult to overstate the bitterness of the rivalry between the two companies. Something similar to traditional Chinese-Japanese rivalry," says one specialist.
One important fact prompting HB's loss of trust in SAB came when CRB dropped its prices aggressively earlier this year just after HB had raised its price. This led HB to question SAB's promise that a vicious price war would be avoided.
Ironically, HB's preferred partner AB also has a potential conflict of interest via a 10% stake the US brewery holds in Qingdao Brewery.
But the eastern province of Shandong is several hundred kilometers away from the north-eastern provinces and does not compete directly with Harbin Brewery in the three provinces.
"Harbin is worried its interests will be sacrificed for CRB," says one investment banker who has advised on the deal.
This specialist claims the bitterness HB feels towards SAB comes from information released by CRB's parent, China Resources Enterprise, to HB management.
CRB allegedly wanted to buy the stake in Harbin Brewery itself. The company was not happy that SAB sidestepped its partnership with CRB to acquire the stake via a special entity named Gardwell, which is 95% owned directly by SAB and 5% by Harbin management.
"CRB is absolutely not interested in allowing SAB, which it feels ought to be safely tied down by its minority position in CRB, to expand on its own and build a powerful independent presence in China," explains one banker.
"Ultimately, that could mean CRB is next on the hit list," he adds.
Therefore, he says that in order to discredit the SAB offer CRE informed HB that SAB had verbally promised to sell its HB stake to CRB at cost at an unspecified date.
Whether or not this was true, it was sure to infuriate HB management and explains CEO Peter Ho's frank comments about management refusing to work with SAB earlier this week.
A sidelight of the Gardwell arrangement was that managers would get put options to the value of 200% of the cost price of their 5% stake.
If SAB's stake rose to 35%, they would double their money as an incentive for the company's management to lean on the city government to sell more of their holding to SAB, 35% being the trigger for a general offer.
They would also double their money if SAB got out. That was the management covering its back in the case of SAB selling out to CRB, says one source.
AB's interest in the HB's brewery is due to the good quality of the company's management, say analysts.
"It's hoped that the management would make a contribution to turning around other takeover targets in the area," says one.
Another reason could be that it simply wants to spoil the prospects of HB's Hapi beer becoming a national competitor to its own national premium brand, Budweiser, also brewed in China.
As for the next step, SAB's recent comments that HB is not central to its plans has perhaps shown that it is keen to look for an exit from its $4.30 bid, equivalent to 36 times the company's 2004 earnings. That is higher than most previous transactions in China, according to ING.
"The company will be under a lot of pressure to justify that price from its shareholders," says one specialist. "Given it bought into the company at HK2.30 per share, it might welcome a counter-offer by AB to sell out at a handsome profit - and to continue its original strategy of working through CRB."
In any case, investors could be jumping the gun.Harbin made only $15 million dollars of profit last year. And although it's an area notorious for heavy drinking, it's also one of the areas that has suffered some of the most painful restructuring since China opened up in 1980.
ING analyst points out that the size of the battle is small considering the size of the market cap of the two contenders.
"They could both afford to pay big premiums," she concludes.
However, because of the disconnect between Qingdao Brewery and Harbin Brewery, Leung sees no synergies between AB and HB, and estimates that AB should not pay more than a 10% to 20% premium to the existing offer price.
"The real coup would be if SAB somehow showed it was capable of creating synergies between CRB and HB," she says.
But it's precisely that which is looking increasingly unlikely.