(Bloomberg) -- Heineken NV is buying a $3.1 billion stake in China’s top brewer in a bid to challenge Anheuser-Busch InBev’s position as the largest foreign beer maker in the world’s biggest market.
The Dutch brewer will gain a 40 percent stake in the parent of China Resources Beer Holdings Co., maker of the country’s best-selling Snow brand. The move gives Heineken a strong local partner in a market that’s embracing imported beers but has proved challenging for overseas players from Asahi Group Holdings Ltd. to Carlsberg A/S.
While foreign companies in industries ranging from cars to clothing are stepping up efforts to tap China’s vast consumer market, the beer business is still dominated by affordable domestic brands like Snow, a light brew whose label depicts a mountain climber hanging onto a cliff face. But costlier options like Heineken and AB InBev’s Budweiser are driving growth, with the market expected to expand by 21 percent to $106 billion in just four years.
The trend toward upmarket brews should benefit foreign producers whose beers are seen as higher quality, but many have struggled to increase their share in a market where a nationwide supply network takes years to build.
China Resources Beer “lacks a premium brand for growth, and we lack the distribution reach CRB definitely has,” Heineken Chief Executive Officer Jean-Francois van Boxmeer said on a call with reporters.
Japan’s Asahi sold out of its stake in China’s Tsingtao Brewery Co. in December after failing to gain traction for its top-selling “Super Dry” brand, while Carlsberg has relied on its control of a local brewer, Chongqing Brewery Co., to build up a presence largely confined to China’s western region. The Danish company has about 5 percent market share overall.
Goose Island
AB InBev, meanwhile, has steadily cornered the premium market and holds a 16 percent share overall. It’s expanded the Budweiser label while buying up local craft beer brands and aggressively marketing its Goose Island brand to fashionable millennials in China’s urban centers.
The Leuven, Belgium-based giant inherited a 49 percent stake in the Snow owner via its acquisition of SABMiller in 2016 but had to sell it to settle antitrust concerns. The deal announced Friday gives Heineken a strong partner as the European companies step up a costly battle for share in countries like Brazil and China, with beer sales flattening or falling in the U.S. and other more developed markets.
“It’s impossible that Heineken can grab a significant larger market share in China by itself,” said Barney Wu, an analyst at Guotai Junan Securities Co. “It has missed the chance as other international rivals such as AB InBev have become strong market leaders in the market.”
In the largest brewery deal to date in China, Heineken is paying an implied price of HK$36.31 a share of the listed entity, a premium of 2.4 percent above its Thursday closing price. China Resources Beer shares fell as much as 2.7 percent in Hong Kong, trimming their gain for the year to 24 percent, while Heineken rose as much as 1.7 percent in Amsterdam early Friday.
Heineken’s operations in the country will be combined with those of China Resources Beer, and the Dutch brewer will license its brand to the Chinese partner on a long-term basis. China Resources Beer’s parent company will acquire Heineken shares worth about 464 million euros ($538 million). The Dutch company will make its global distribution channels available to China Resources’ brands including Snow.
‘Many Challenges’
The deal offers China Resources Beer opportunities for both the Snow and Heineken brands. Chief Executive Officer Hou Xiaohai said the company aims to move the Snow brands upmarket, while building Heineken into the No. 1 brand in China’s high-end market.
“The premium market is the important battlefield for brewers to win in China,” Hou said on a conference call. “The mission is clear, but it’s also facing many challenges.”
Anheuser Busch has expanded Budweiser while buying up local craft beers and aggressively marketing its Goose Island brand to millennials in China’s urban centers. Heineken has struggled to build its footprint in China, with less than 0.5 percent of the market last year, according to Euromonitor. Its share has remained stagnant largely due to the lack of a local distribution network, said Bloomberg Intelligence analyst Shen Li.
The Chinese market has shrunk 7 percent in volume from 2012, even as it has surged 42 percent in value, according to 2017 data from Euromonitor International, as the rising middle class pivots toward more expensive goods, often imported.
China Resources Beer is working with Nomura Holdings Inc. and UBS Group AG, according to regulatory filings. JPMorgan Chase & Co. is acting as sole financial adviser to Heineken, people with knowledge of the matter said, asking not to be identified because the information is private.
©2018 Bloomberg L.P.
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