After a month of heated bidding, in June 2004 SABMiller plc, the world's second largest beer manufacturer, announced a sudden withdrawal from the competition for the shares of Hong Kong-listed Harbin Brewery (0249) and agreed to sell its holding to its global competitor and world's largest beer manufacturer, Anheuser-Busch (NYSE: BUD). The share scramble for Harbin Brewery had finally come to an end, but the effect of this bidding war is far from over – with particular implications for China's M&A industry.
Poor shells
Previously, the scarcity of Hong Kong-listed shells coupled with local governments' reluctance to restructure government shareholdings, meant that most M&A and restructuring of listed companies in China tended to centre around poorly performing listed companies, the main objective being the listed shell. But the Harbin Brewery case changed all of that. Now, more importance is attached to the intrinsic value of the listed company rather than its shell, symbolizing the gradual maturity of China's M&A market.
Evaluating the M&A target
When engaged in M&A activities, many listed companies in China disregard the fact that valuations bear a clear mark of the planned economy, including, for example, qualification for share distributions, possession of monopolistic resources or entitlement to preferential policies. In the scramble for Harbin Brewery, Anheuser-Busch based its high offer on a comprehensive consideration of the market position of Harbin Brewery, its integrated M&A capacity and human resources.
Harbin Brewery has thirteen subsidiaries with an annual manufacturing and marketing capacity of over 1.5 million tons. It is the fourth largest beer manufacturer in Mainland China boasting a 70% market share in Heilongjiang, 40% in Jilin and 25% in Liaoning. It also exports its products to over 20 countries and regions across the globe including Russia, Japan, the UK, the US, Singapore, Hong Kong and Macao. Prior to its listing, Harbin Brewery had acquired a number of domestic beer breweries and turned them around within a year of acquisition.
The build-up to the acquisition by Anheuser-Busch started with its listing on the Hong Kong Stock Exchange in June 2002. Gardwell, an investment vehicle 95% controlled by SABMiller and 5% by Advent Strategic (the BVI-registered management buy-out vehicle set up by six senior executives and headed by Li Wentao, chairman of Harbin Brewery), then purchased 29.6% of its shares for US$85 million, thus becoming the largest shareholder of the brewery. By this means, senior management succeeded in taking a stake in the business and injecting vitality into its expansion.
Control of cash flow versus M&A efficiency
On acquisition, the priority for many listed companies in China is to avoid making cash payments and controlling the outflow of cash, but such acquisition practice often weakens its acquisition efficiency. Besides, as the acquisition is usually conducted by agreement, lack of an extensive and transparent transaction mechanism will throw doubt on the rationality of the acquisition price.
In the share scramble for Harbin Brewery, Anheuser-Busch offered HK$5.58 a share, valuing Harbin Brewery at US$720 million. The offer was nearly fifty times the listed company's previous year profits, thus becoming one of the highest premiums paid for a China-based brewery and reflecting the preference of cash deals over equity deals, as was the previous case with SABMiller.
* The authors are senior analysts at HollyHigh International Capital.
