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China: Anheuser-Busch Cos., the world's biggest brewer, valued China's Harbin Brewery Group Ltd. at $502 million a month ago. Now, it's set to pay $757 million for China's fourth-biggest brewer. The price has climbed as St. Louis-based Anheuser-Busch battled SABMiller PLC, the world's second-biggest brewer, for control of the Harbin-based beermaker, Bloomberg posted on June 16.

Anheuser-Busch, which won the bidding war when London-based SABMiller withdrew its offer June 9, is betting that growing sales in China will counter slowing demand in the U.S. and Europe. Price is not a deterrent, said Stephen Burrows, the head of Anheuser- Busch's international operations. "When opportunity knocks, you answer the door," said Burrows, 52. "As fewer good assets are available, companies are seeing the door of opportunity close, so there is an acceleration of prices."

SABMiller's withdrawal frees Anheuser-Busch to buy the 64 % of Harbin Brewery it doesn't own.

Anheuser-Busch and other overseas brewers risk paying too much for acquisitions in China, said Tan Wai Kee, a Hong Kong-based vice president at Belgium's Interbrew SA. They're entering a market where more than 500 mostly state- run beermakers use only two- thirds of their production capacity, and where a bottle of beer can sell for as little as 15 cents.

"I do think operators must keep a sanity check on what they are prepared to pay," said Tan, 55. "As the good ones get bought up, you have to realize there is a scarcity value."

Interbrew, the maker of Stella Artois beer, bought a 50 percent stake in China's Lion Breweries for $131.5 million in September, with an option to buy the rest for the same price.

SABMiller has a 29 percent stake in Harbin Brewery that it bought last year for about $87 million. It said in a statement that Anheuser-Busch will pay $211 million for the stake.

Anheuser-Busch's bid values Harbin Brewery at 49 times 2003 earnings. That compares with an average valuation of 14.3 times earnings for European brewers last year, according to a report by Citigroup Inc.'s Smith Barney division. Anheuser-Busch and SABMiller are among dozens of global beermakers aiming to tap growth in China, which surpassed the U.S. as the world's biggest beer market by volume in 2002.

China's beer sales grew 6.3 % by volume in 2002, compared with 1.3 % in the U.S. and 2.6 % in Europe, according to Canadean Ltd., a beverage research company based in Basingstoke, England. Canadean estimates that China's beer market will expand as much as 5 % a year until 2008, compared with growth of 0.7 % for the U.S. and 2.5 % for Europe through 2005.

Anheuser-Busch and other overseas beermakers need to expand in China, said Thomas Gayner, chief investment officer at Glen Allen, Va.-based Markel Corp., whose $1 billion under management includes 1.23 million Anheuser- Busch shares. "It's such a big market that they could stand to have more," Gayner said. Even so, he said buyers need to be selective. "I hope the beer business doesn't pursue a growth-for-growth's-sake model," he said. "That doesn't do anyone any good."

The fight for Harbin Brewery began May 2, when Anheuser-Busch said it had bought 29 percent of the beermaker from its owner, the city of Harbin, for HK$1.08 billion ($138.5 million), beating out SABMiller for the stake. SABMiller responded with a general offer for the Chinese company three days later.

Anheuser-Busch then bought an additional 6.9 percent of Harbin Brewery from Capital Group, the third-largest U.S. mutual fund, triggering a general offer on June 1. Harbin Brewery asked shareholders to accept Anheuser-Busch's offer, saying SABMiller's bid was "wholly unsolicited." The U.S. company is pushing to expand in a market where past investments by other brewers haven't reaped profits.

Asia Pacific Breweries Ltd., a Singapore-based venture 46 percent- owned by Heineken NV, has invested $270 million in China since 1988 and has yet to make a profit, said Koh Poh Tiong, the venture's chief executive. "We have a very high tolerance level for frustration," Koh said. "In China, it's a long march."

Denmark's Carlsberg A/S invested $50 million in 1998 in a Shanghai brewery to make Carlsberg beer. Three years later, it sold 75 percent of the stake to Tsingtao Brewery Co., China's biggest brewer, for $18 million. "Carlsberg expected bigger growth in the premium market, and that growth didn't materialize," said Jesper Bjorn Madsen, Carlsberg's senior vice president for Asia.

The battle for Harbin Brewery is part of a strategy shift by some overseas brewers as they start buying into local beermakers rather than brewing and marketing their own brands.

Last year, Anheuser-Busch agreed to pay $182 million to raise its 4.5 percent stake in Tsingtao Brewery, the maker of China's best- selling Tsingtao beer, to 27 percent over seven years. For the previous decade, the U.S. company had focused on building its Budweiser brand from a brewer in Wuhan.

Overseas brewers have paid more than a combined $700 million for stakes in Chinese breweries in the past two years. Scottish & Newcastle PLC, the maker of Kronenbourg and Newcastle Brown Ale, spent $63.5 million on a 20 percent stake in Chongqing Brewery, a market leader in southwestern China, in February. The investment came a month after Heineken Asia Pacific Breweries spent $71 million for 21.6 percent of southern China's leading Guangdong Brewery Holdings Ltd.

Even as China's market consolidates, overseas brewers still face about 500 local competitors in a market divided by regions, cultures, tastes and incomes. The 10 biggest brewers controlled 53 percent of the total market last year, compared with 22 percent in 1996, according to Canadean.

That means it's difficult for a single brand or even a single brewer to amass much market share, said Kevin Baker, Canadean's director of alcoholic beverages.

Low beer prices are another hindrance to profits. China's beer market was worth $19 billion last year, compared with $79.2 billion for the U.S., even though the countries both consumed about 240 million hectoliters, according to Canadean estimates.

6.3% How much China's beer sales grew by volume in 2002, compared with 1.3 percent in the U.S. and 2.6 percent in Europe, according to Canadean Ltd., a beverage research company based in Basingstoke, England

5% How much Canadean estimates that China's beer market will expand each year until 2008, compared with growth of 0.7 percent for the U.S. and 2.5 percent for Europe through 2005


18 June, 2004