Greed and Fear over Harbin Brewery

What happens if Anheuser does not bid?

What is Anheuser Bush, the world's biggest brewer waiting for? That is the question increasingly nervous investors are asking themselves in the wake of SAB Miller's HK$4.30 richly-priced general offer for Harbin Brewery on May 24. The offer is equivalent to a price/earnings ratio of 38 times 2003 earnings and four times Harbin's net asset value for the same year.

The stakes are high. If AB can be counted on to make a counter offer to SAB Miller, then Hong Kong-listed Harbin Brewery's stock price may continue to shoot through the roof. The share price has already jumped from HK$3.225 at the end of April to its current HK$5 price in the wake of the takeover fever.

However, some specialists believe the road to riches for Hong Kong investors, who own the crucial 40% not sewn by the two beer giants, could be more slippery than expected. The two beer giants currently own 29% each.

"I feel AB is creating an illusion that it's about to bid for the company at a steep premium. That is what's creating the confidence among investors to keep the share price at its current level of HK$5," says one observer.

"Creating that illusion could mean the SAB bid isn't taken up, since investors will be greedy for more," he adds. "But AB could be playing with investors' expectations until the offer period lapses and then end up not making a bid."

Under the Hong Kong takeover code, the offer will lapse and cannot be resurrected for 12 months if it does not attract 50% or more of the shares after sixty days.

This might enable AB to come in as the only bidder, and pick up the company for a much lower price. AB would be reassured by the fact no other breweries have expressed in HB so far.

Alternatively, if SAB failed to attract the additional 21% required, AB could simply not bid for the shares at all, but stick to its existing stake while effectively controlling the company through its close links to existing management. The latter have made it clear they support AB in the role of strategic investor - via a similar exclusive arrangement originally arranged with SAB before management are believed to have lost faith with the company.

The price of such a bluff would the losses suffered by minority investors. It would be a disaster for those investors that climbed late on the band wagon, since the new price - if any - would logically be at a massive discount to what the company is trading at now.

Investor confidence that AB is serious about Harbin Brewery has been fuelled by statements from company representatives that the north-eastern city of Harbin and the surrounding three provinces are of 'strategic' significance. This has been interpreted as indicating AB will bid what it takes to secure a dominant position in China's thirstiest region.

"It would be a highly risky approach for AB if they failed to bid and are definitely interested in the company," says one observer. "What if investors do take up the SAB offer? In AB continues to hold only 29% of the company, it won't have control over important issues such as M&A or new equity raisings because these kinds of initiatives cannot be decided at board level, but need full shareholder approval."

Other factors, however, could explain why AB is holding off from a counter offer. The AB stake was acquired from an opportunist consortium Global Conduit Holding, allegedly composed of foreign and mainland investors.

Almost nothing is known about this group, which was owned by the now voluntarily liquidated BVI registered group Global Select Enterprises.

What is puzzling about the consortium is that its stake in HB was flipped on to AB after just 40 days.

That caused the Harbin city government to lose out on a fat premium, since the stake, acquired for HK$3.25 was sold on for HK$3.70 just a few weeks later, netting the consortium HK$131.2 million ($16.8 million).

Some specialists claim the consortium had the connections to get AB interested in a deal, which the Harbin city government could not do on its own. However, one leading commentator in Hong Kong is sceptical.

"Heck, the city government could have gotten the price they got, HK$3.25, just by calling up an investment bank and placing the whole lot," he says.

During the early stages of the deal, this caused some apprehension amongst investors that higher authorities in Beijing would veto it. This is because the state is extremely nervous about assets being sold below their market price during a period when it is carrying out the biggest asset sell-off in modern Chinese history. To ensure this does not happen, the government has imposed a floor - the net asset value (NAV) of a company.

SAB's offer for Harbin comfortably exceeds that hurdle, but it is not clear what the government's view on the amount of money left on the table is. In a region devastated by economic restructuring, funds are vitally needed for new development.

On May 19, AB attempted to clarify the Global Conduit transaction through a press release, which stated that all 'requisite' approvals had been obtained from the local and central authorities.

But according to one observer the press release does not say what approvals it thought were needed. 'Requisite' is a matter of judgment between buyer and seller, particularly in a grey legal system where nobody is really sure of the rules and the more you ask for, the more the process slows down," he points out.

"In any case, why didn't the Harbin city government conduct a public auction," he adds. However, one observer said it does not make sense for a blue chip company such as AB to have failed to get the correct approvals.

"It's also very much in the interest of the city government that the deal be above board," he comments.

One of the most interesting aspects of the deal is the view of Harbin Brewery management, which initially appeared to favour SAB, but then switched allegiance to AB after they felt SAB failed to look after their best interests. Management currently favour AB as the company's strategic investor.

However, they also stand to gain from a put option on shares they own in Gardwell, an SAB vehicle, which acquired 29.6% of Harbin Brewery from CEDF Brewery in June last year. Management owns 5% of this vehicle.

If SAB obtains 35% (the trigger level for a public offer) before July 28, or sells its stake before that time, the put option will be worth $110 million ($14 million) rather than HK$55 million if SAB's stake remains at 29%. In either case, management will lock in considerably upside from the HK$5 million price they originally paid for the stake.

So from the management's point of view, a lapsed SAB bid and the failure of an AB counterbid would be the worst possible outcome. How that would affect the strategic relationship between AB and HB is another interesting question.

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