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AB InBev Will Try to Keep SABMiller’s Stake in China’s Snow Brand

Anheuser-Busch InBev NV will try to defy conventional wisdom and hold on to SABMiller PLC'sChina beer business CR Snow, according to two people familiar with the company's plan.

The idea flies in the face of analysts' expectations that AB InBev would be forced to divest Snow, the world's No. 1 selling beer by volume, in order to secure regulatory approval in China for its roughly $108 billion takeover of SABMiller.

Snow, a mild domestic lager, is mostly sold in China, so few people know of it outside the country. Yet it could be the most strategic asset SABMiller holds. Snow has grown rapidly as Chinese have increased their beer consumption to an average of 45 liters from 7 over the past 25 years, according to Deutsche Bank.

Keeping the business won't be easy. China Resources has the first option to buy out CR Snow and has hired Nomura Holdings Inc. as an adviser, according to a person familiar with the hiring as well as one of the people familiar with AB InBev's plan. Nomura valued SABMiller's 49% interest in CR Snow at $3.6 billion in an analyst report.

AB InBev declined to comment. China Resources didn't respond to requests for comment.

"China Resources is in the driver's seat here," said HSBC analyst Carlos Laboy. "It has to decide: Do we want to keep (AB InBev) as partners or try and buy back our equity stake at an attractive price?"

But AB InBev thinks it can make a case that both sides would benefit by consolidating—which would increase prices—in China, one of the world's largest and most competitive beer markets.

AB InBev has an estimated 18% market share in China with its Budweiser and Harbin brands while CR Snow has a 30% market share, according to Seema International Ltd., a Hong Kong-based alcohol beverage consulting firm. They compete against Tsingtao Brewery, Beijing Yanjing Brewery Co. and Carlsberg A/S.

Beer prices are so depressed that brewers struggle with profitability. Earnings before interest and taxes per hectoliter of beer in China is $2, a fraction of the global average of $19 per hectoliter, said Glen Steinman, president of Seema International.

SABMiller gets 2% of its operating profit from CR Snow, and China Resources reported $97.6 million in profit from the business in 2014.

AB InBev typically is averse to holding stakes in companies it doesn't control, said one of the people familiar with the company's plan for CR Snow. But in this case, the Belgian brewer would be comfortable with China Resources owning 51% or more of the company provided AB InBev operates it, the person said.

In addition to expanding Budweiser's distribution, it could cut costs and eventually boost CR Snow's earnings before interest taxes, depreciation and amortization to $1.5 billion, the person said.

AB InBev has been moving quickly to complete divestitures around the world so it can close its takeover of SABMiller by the second half of the year. The company already has agreed to sell SABMiller's interest in the U.S. joint venture MillerCoors LLC to eliminate antitrust concerns. It also is in the process of selling the Peroni and Grolsch beer brands to appease European regulators.

But finalizing a plan for Snow is expected to take longer because the process regarding mergers in China is less straightforward and discussions with China Resources, a state controlled company listed on the Hong Kong exchange, will take time.

"I imagine this transaction will receive very significant scrutiny because of its sheer size," Ronan Harty, a partner at Davis, Polk & Wardwell LLP, who has worked on antitrust matters in China but is not involved in this one. "The (antitrust) review period itself can be extremely, extremely lengthy."

28 Jan. 2016

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