August 3, 2018 / 6:00 AM / 10 months ago

Breakingviews - Heineken beats honourable retreat from China

A worker checks the quality of beer at a production line at the Snow Brewery in Shenyang, northeast China's Liaoning province February 2, 2007. REUTERS/Sheng Li

SINGAPORE (Reuters Breakingviews) - Heineken has found an honourable way to retreat from China. The Dutch giant on Friday announced plans to hand its business in the People’s Republic to China Resources Beer and take a $3.1 billion stake in the country’s top brewer. Focusing on other Asian countries like Vietnam, where it has more clout, makes sense. Influencing the fortunes of its brand in the world’s largest beer market, however, will be more challenging.

The world’s most populous country should be every brewer’s dream. Yet cheap pints rule and Heineken has struggled to make significant inroads even at the premium end, where it competes with larger rival Anheuser-Busch InBev. CR Beer, which makes the best-selling Snow, dominates with roughly a quarter of the market.

The Amsterdam-based brewer is not cutting its ties with China entirely, though. It will buy 40 percent of the unlisted holding company that controls 52 percent of CR Beer. That purchase does not come cheap. At a small premium to the market price, Heineken is paying a multiple of 39 times expected 2019 earnings, according to Thomson Reuters I/B/E/S – a valuation closer to spirits manufacturers than rival ale makers. In return, CR Beer will buy Heineken’s Chinese breweries, and ultimate parent China Resources Enterprise will acquire a sliver of Heineken’s equity, lowering the Dutch group’s net outlay to around $2.25 billion.

The Beijing company, meanwhile, gets insight into the top end of the market, which it needs to counter oversupply and plateauing volumes as tastes change. It wants a leading position there.

Key to the partnership will be the licensing agreement which allows CR Beer to make Heineken-branded brew and sell it exclusively in mainland China, Hong Kong and Macau. The $58 billion Heineken has signed other such deals, but standards are hard to maintain, and any damage to the brand would be felt around the world.

Heineken’s investment comes with representation and nomination rights for the board of the listed company. As others have learned, 40 percent of an unlisted, state-controlled Chinese firm does not necessarily translate into influence. Given company’s weak starting position, however, it may have made the best of a bad round.


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