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Frothy market

17 Sep 2015 By Quentin Webb

Big Beer’s most monstrous deal yet could fuel an overdue round of M&A in China. If Anheuser-Busch InBev can swallow $90 billion rival SABMiller, complete with its 49 percent stake in Chinese market leader CR Snow, others in the Middle Kingdom may seek tie-ups. Alternatively Snow’s other owner, China Resources Enterprise, might take full control and mop up smaller brewers itself.

Adding Snow to AB InBev’s collection of beer brands would boost it greatly in China. Susquehanna analyst Pablo Zuanic calls China’s best-selling brew the “most strategic part” of the proposed AB-SAB union. The Budweiser producer’s local tipples include Sedrin and Harbin, a favourite in the chilly north-east. The deal-machine has already set its sights on being No. 1 in Asia, which means it must win in China.

Uniting would mean a huge leap in market concentration – Snow has 23 percent of the market by volume last year to AB InBev’s 14 percent, CRE says. The combination could cause others, like second-placed Tsingtao and fourth-ranked Beijing Yanjing, to consider mergers. The two companies are worth about $6.4 billion and $3.3 billion respectively, based on Sept. 16’s closing share prices.

There are two obstacles to AB InBev’s ambitions. First, regulators might block the emergence of such a powerful market leader, especially a foreign one. And second, even if mandarins approve, the change of control at SAB may give CRE a right to buy out its joint venture partner.

At current market prices, the stake would be worth a little over $4 billion, based on CRE’s own market capitalisation and adjusting for a special dividend due shortly as the group morphs into a pure beermaker. CRE could then seek further deals in the People’s Republic to safeguard itself against a stronger AB InBev.

Either way, the Chinese market could get more concentrated – assuming various local governments and other backers, such as Tsingtao’s Japanese investor Asahi, agree.

And not before time, investors would say. For years Chinese lager has been Exhibit A in the argument that big countries do not necessarily mean big profits. Deutsche Bank reckons China downs a quarter of the world’s beer but that produces just 3 percent of industry operating profit. A fresh round of M&A would go down well.


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