Who is the real winner in Heineken's deal to crack open China?

The Dutch brewer is trying to catch up with rivals AB InBev and Carlsberg in China but investors may remember SABMiller how teamed up with the same Chinese beer maker, and struggled. Meanwhile CR Beer has finally sealed a premium beer license.

As Heineken toasts its deal with China's largest brewer to boost its presence in the world’s biggest beer market, it would do well to study the fate of its rivals in the Middle Kingdom.

On the surface, Heineken’s agreement to buy 40% of China Resources Beer (CR Beer's) holding company for HK$24.35 billion ($3.1 billion) looks like a win-win for both sides.

Heineken has the brands but not the scale in China; while CR Beer probably has the best distribution platform in the market via its 91 breweries, but not the premium brands. The deal comes as China’s burgeoning middle class crave more imported beers.

However, Heineken has not secured control over CR Beer and there does not seem to be a clear route to a takeover. The Dutch brewer does not have representation in CR Snow management either which is an operational and reputation risk. CR Beer has no previous experience of building a market for international premium brands.

Heineken's influence at CR Beer is limited to the board level with only one seat, with no sway at management level, the companies said in a statement on August 3.

“This could hold back Heineken's ability to fundamentally shape the commercial agenda for the roll-out of the Heineken brand in China,” said Jefferies analyst Edward Mundy in a report to investors.

To try to lock down CR Beer, and make sure it takes no other partners or creates joint ventures in the future, Heineken is going all in. The world’s second-largest brewer by revenue is selling CR Beer its China operations, including three breweries, for HK$2.4 billion (€263 million) and what little distribution it has in the country.

Its deal team has also negotiated several layers of governance, including representation on the board of CBL, nomination rights to the board of CR Beer, the establishment of a Strategic Advisory Council and a Trademark License Agreement.

The controlling Heineken-family is maybe even trapped in the partnership. A stake in the holding company rather than in the listed entity potentially makes it more difficult to sell in the future should Heineken ever fell the need.

To boot, credit rating agency Moody’s took a dim view of the deal. It said that the China partnership will further delay the reduction of Heineken's leverage, that is already high for its rating category. The transaction will also reduce Heineken's financial flexibility which is needed to absorb any potential deterioration in its operating performance.

Goldman Sachs and Euromonitor
Falling behind its biggest rival

Heineken has a team on the ground in China and will stay on in an advisory capacity for CR Beer's management, indeed they have been working on a detailed business plan for the last few months, according to a person familiar with the deal.

Given Heineken has struggled to grow its brand in China, and felt it could never secure control of a leading brewer in China, the Amsterdam-headquartered brewer probably had little choice.

Heineken is moving away from minority stakes where it can, taking control of Brandhouse in SouthAfrica in 2015 and APB in 2012; but China is the exception.

It was falling even further behind AB InBev in China as time went by so must have felt pressured to team up with CR Beer and try tie it down as best it could.

AB InBev's Ebitda in 2017 at its China business was an impressive $1.3 billion. "This opened the eyes of management at foreign beer companies to the potential of the premium market. Before they had dismissed China as volume but no profit," the person said.

However this is an out-of-charachter lack of control for a bet on the future growth of premium brands in China.


China is a tough market for foreign players to navigate and the state tends to hold most of the cards.

The beer market in China has broadly been open to foreign players. London-based SABMiller bought a 49% stake in a joint venture with CR Beer in 1994,  but it never managed to negotiate control.

Heineken's indirect stake in CR Beer is just 20.67% compared with the 49% that SABMiller had in the main operating entity.

After Anheuser-Busch InBev bought SABMiller, the London-based firm had to sell its stake in the JV  in 2016 to win clearance for the mega-merger from Chinese trust busters.

China clearly spotted an opportunity for state-owned CR Beer to buy the 49% stake on the cheap. AB InBev had no other interested party in the minority stake and was on the clock to get its merger completed, said a person familiar with the company’s history.

At the time the joint venture, called China Resources Snow Breweries, was struggling as Chinese drinkers increasingly preferred wine as their tipple, the economy slowed and the government’s anti-corruption campaign put a dampner on partying.

SABMiller was largely unsuccessful in growing its premium brands such as Miller Genuine Draught.

CR Beer bought back AB InBev's 49% stake in the business for $1.6 billion and has sold the 20.67% stake for $3.1 billion -- a return of 4.6 times.

Another foreign brewer in China also struggled. Asahi bought a 20% stake in Tsingtao in 2009 from AB InBev for $667 million and sold it in 2017 for $1.2 billion, while a financial success it was not a commercial slam dunk. It's "Super Dry" brand failed to gain traction.

The partnership may have suffered because Tsingtao felt like a hand-me-down fro AB InBev and hadn't negotiated the partnership from scratch. Demand for its products might also have been luke warm due to China-Japan tension. 

Asahi also left a lot of value on the table, Tsingtao's shares have risen strongly since Asahi sold out. 

Heineken, unlike Asahi, is not buying in at the bottom of the cycle. The implied price of the deal at HK$36.31 a share is in line with CR Beer's recent trading.


Deal structure


For CR Beer, acquiring the license for the Heineken brand in China is a major step towards its goal to penetrate into the premium beer segment and expand its profit margins. AB InBev's Ebitda margins are mor than double those of CR Beer in China.

It has been seeking partnerships since its ties with SABMiller dissolved.

While China accounts for 23% of global beer volumes, the market has been shrinking in recent years.

Beer sales in China fell during 2017, the fourth successive year of decline, according to Euromonitor. The dwindling population of beer drinkers and changes in consumer lifestyles, such as increased consumption of alternative alcoholic drinks, were cited by the market research firm in a July report.

The beer industry has struggled with overcapacity and an inability to deliver value to shareholders. The problem is likely to worsen, said Euromonitor. The five largest brewers are CR Beer, Tsingtao Brewery, Beijing Yanjing Brewery, Harbin Brewery Group and Budweiser Wuhan International Brewing.

CR Beer's flagship brew is the mainstream brand “雪花 Snow” is the world's biggest selling beer brand by volume, but Chinese people are increasingly enjoying foreign imports. 

The premium segment is expanding if still a nascent part of the market at about a 7% share.

Euromonitor; Goldman
Beers in China

According to Euromonitor data, the Chinese beer market will grow in value terms in the mid single-digit rates over the next three to four years, largely driven by the shift towards premium beers.

“Given the slowdown in Chinese beer volumes, we believe that there is more appetite for a premium brand strategy at CR Beer vs history,” said Jefferies' Mundy.

Since last year CR Beer has set its sights on upgrading its product mix to avoid fierce competition in the low-end of the market. This is important to the company’s overall strategy since most of its brands, including CR Snow, Kingway and Siwo, sell at about Rmb3 per 500 ml. Premium brands like Heineken are sold at Rmb10 to Rmb20.

“Sales of mid- to high-end beer became the main driver for the Chinese beer market and premiumisation is one of the most important strategies for the Group,” China Resources Enterprise, the Hong Kong-listed company behind CR Beer, said in a statement on Friday.

“The transactions represent an important strategic and long-term growth, and value enhancing proposition for the Group to expand into the premium beer market.”

Heineken is the world’s second-largest brewer in terms of revenue and has a portfolio of more than 300 international premium, regional, local and specialty beers and ciders.

Heineken will license the exclusive rights to use the Heineken brand in mainland China, Hong Kong and Macau to CR Beer.

To be sure, it's not clear how much canabilisation of its brands CR Beer will suffer if it starts to push Heineken labels down its distribution network.

Meanwhile, CR Beer’s holding company will buy 0.9% of Heineken for €463.63 million ($537 million) is small beer, more of a symbolic stake than anything meaningful. It is hard to see global markets embracing a Chinese food and beverages brand over premium beers, which consumers view as higher quality. 

JP Morgan is advising Heineken.

UBS and Nomura were financial advisors to CR Beer. UBS and Nomura also advised CR Beer on its HK$9.5 billion rights issue at around a 22% discount to terp to fund its acquisition of the stake in its joint venture with SABMiller 2016. Citi helped on the financing of that transaction.

Additional reporting by Danny Leung


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