Interbrew buys Zhejiang Shiliang Brewery

Battle for China''s beer market continues to bubble as Interbrew snaps up Zhejiang Shiliang Brewery

Interbrew announced today (Tuesday) that it has acquired a 70% controlling interest in Zhejiang Shiliang Brewery Company located in the wealthy coastal province of Zhejiang. ING acted as the financial advisor to Interbrew in the $53.2 million transaction.

The transaction strengthens Interbrew's number one position in Zhejiang Province, where the company already has a 70% stake in the KK Group. The company says the most recent transaction will give it a market share of close to 50%.

The takeover is expected to close later this summer. It will raise Interbrew to the number two position in terms of market share in China, producing some 30 million hectolitres through 17 breweries, or 10% of the total market. The new acquisition will contribute around two million hl to the total figure.

In the wake of Anheuser Busch's acquisition of Harbin Brewery earlier this month, many observers were waiting to see if the acquisition would signal a major increase in the price of brewing assets in China.

But Interbrew paid around 11 times EV/EBITDA, compared to the whopping 17 times EV/EBITDA paid by Anheuser Busch to secure victory over SAB Miller for Harbin Brewery.

Late last year, Scottish and Newcastle paid an even more eye-watering 20 times for 20% of Chongqing Brewery, while Danish brewer Heineken paid around 13 times EV/EBITDA for its acquisition of a 21% stake in Guangdong Brewery in January this year for $72.5 million. Interbrew's previous acquisition in China was a two-step buy-in of the beer business owned by the Lion Group, a Malaysian conglomerate, for $263 million, and at an EV/EBITDA of 13.6 times.

The transaction gave Interbrew access to six provinces. The second tranche of the acquisition occurs in September this year, with each tranche amounting to 50% of the shares.

“So far it's difficult to draw any conclusions," one banker comments. "Although the price paid by Interbrew implies there has been little asset inflation, one should remember that the Interbrew transaction was well underway before the Anheuser Busch acquisition. We'll have to wait for further acquisitions to see if beer assets have seen a real mark-up. Of course, contested takeovers often see prices going through the roof."

Some say Harbin Brewery is worth a higher multiple than Shiliang because it has a strong presence in the north-eastern parts of the country, where beer consumption is highest. It also has brands with potential for national recognition such as Snowflake.

By contrast, Shiliang's main brand, Red Shiliang, has a significant presence in just one province, although a wealthy one by Chinese standards, with a population of 47 million.

Interbrew's acquisition shows how China is shaping to be a key battle ground for global brewers. It was Interbrew's recent merger with Latin American giant AmBev which knocked Anheuser Busch off the global number one position by volume.

However, in China, Interbrew is still No. 2 behind the Qingdao-Anheuser Busch Axis. Qingdao has the biggest market share with around 10%, while newly acquired Harbin Brewery has a market share of 4%. Anheuser Bush also brews relatively small quantities of Budweiser in Wuhan. Anheuser owns just under 10% of Qingdao with the option of increasing that to 27% through a convertible band.

Brewers in China are trying to get the balance right between selling high-priced foreign beers to the price-conscious local market and acquiring a stable of strong local brands. The hope is that the better local brands can build on their local reputations to become national brands and entice China's picky consumers to pay a few extra cents over less-well known beers.

During the first phase of foreign expansion into China in the 1990s, foreign brewers focused only on their own brands. But the strategy proved an expensive failure, since local drinkers felt no empathy for classic UK brands such as Tenants Lager and were reluctant to pay the significantly higher prices.

Thanks to the presence of some 400 small brewers across the country, many of which are state-owned and operate at a loss, 640 ml of beer in China can be found for as low as $0.18.

Interbrew has six breweries and one bottling center in Zhejiang Province, representing operations in the cities of Ningbo, Zhoushan, Wenzhou, Yandangshan, Pingyang, Jinhua and Yuyao.