Greed and Fear over Harbin?

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. That’s equivalent to a price/earnings ratio of 38 times 2003 earnings and four times its 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 will continue to shoot through the roof. The share price has already jumped from xxxx to xxxx 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 on just over 29% each, could be more slippery than expected. 

“I sense that AB is creating an illusion in the market that it’s about to bid for the company at a steep premium," says one specialist close to the transaction. "That’s what’s creating the confidence among investors to keep the share price at its current level of HK$5. Indeed, AB has been careful to spread reports that this is roughly what they value the company at.".

“Creating that illusion could mean the SAB bid isn’t taken up, since investors will be greedy for more. But AB could play with investor expectation until the offer period lapses on June 21- and then end up not making a bid,” he says.

That would 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 an interest in HB so far.

The price of carrying out such a successful bluff would the losses suffered by minority investors. It would be a disaster for minority investors who have climbed late on the band wagon, since the new price would logically be at a massive discount to what the company is trading at now.

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

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

Almost nothing is known about this group, which was owned by the now voluntarily liquidated British Virgin Islands 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 the deal, which the Harbin city government on its own could not do.

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 the deal. That’s because at a period when the state is carrying out one of the biggest state asset sales in modern Chinese history, it’s extremely nervous that assets will be sold at below their market price. To ensure that doesn’t happen, the government has a floor, namely the net asset value of the company.

HB comfortably exceeds that hurdle, but it’s 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 opportunities, point out observers.

On May 19, AB attempted to clarify the situation 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 doesn’t 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.

One of the most interesting aspects of the deal is Harbin Brewery management. Strongly in favour of the deal with AB, they nevertheless stand to gain substantially through a put option on the shares they and SAB Miller (5% and 95% respectively) hold in Gardwell, the vehicle which acquired the 29.6% from CEDF Brewery in June last year.

In the case of the SAB obtaining 35% (the trigger level for a public offer) before July 28 , or SAB sells its stake before that time, their put option would be worth $110 million rather than HK$55 million. In either case, that would be solid improvement on the HK$5 million cost price they paid for the stake.

Management would lose the extra value of their options if the SAB offer lapsed and at the same time AB didn’t make a bid by July 28. That would certainly put the relationship between the management and AB under some strain, unless AB found a way to compensate them.

Falling out with their strategic investor would be nothing new for HB. SAB originally had a three year exclusive arrangement to be their strategic partner, but that was voted down at a May board meeting, on which SAB had two non-executive directors.

It’s clear that SAB want to integrate SAB into their primary expansion vehicle, China resources brewery, in which SAB has a 49% stake. That’s what is causing the ructions with the fiercely independent north-eastern brewers. But that was a strategy that was clear long before they took SAB’s cash.