AB-InBev agrees to fire sale of SABMiller’s stake in CR Snow

That’s a blow to AB-InBev. The Chinese government not only prevented them from obtaining SABMiller’s 49 percent stake in CR Snow, the country’s major brewer. It also forced AB-InBev to accept a price which is far below analysts’ original valuation.

AB-InBev announced on 2 March 2016 that it has entered into an agreement to sell SABMiller’s stake in China Resources Snow Breweries Ltd. (“CR Snow”) to China Resources Beer (Holdings) (“CRB”), which currently owns 51 percent of CR Snow. China Resources and SABMiller have been partners in the joint venture since 1994. Together they grew Snow into the world’s number one beer brand in terms of volume (about 100 million hl) as the Chinese have increased their beer consumption to an average of 45 litres from 7 litres over the past 25 years.

The agreement values SABMiller’s 49 percent stake in CR Snow at USD 1.6 billion, says AB-InBev. This must have come as a surprise to many analysts. Last year, Nomura, a bank, had put a price tag of USD 5 billion (or 15 times EBITDA on SABMiller’s estimated profit share of USD 300 million), but later revised it down to USD 3.6 billion.

Assuming that CR Snow’s total EBITDA in 2015 dropped to an estimated USD 550 million, the Chinese still got SABMiller’s stake cheaply at roughly 6 times profits (based on 2014 profits). Even Constellation Brands, which was the big winner from AB-InBev’s forced sale of Modelo’s U.S. business, had to pay 9 times EBITDA. But without SABMiller’s expertise, insiders say, the buyer will struggle to maintain profitability. Hence the price of 6 times profit may equal 10 times forward earnings estimate.

Given that the Chinese are henceforth home alone at CR Snow, what’s to stop them from selling a stake to another foreign brewer, albeit at a much higher price than what they paid for? Surely Heineken would be interested, as its market share in China is close to insignificant at the moment.

After picking up Snow at a bargain price, CR Beer still faces several challenges, media say. For the past two years, beer volumes in China have declined. Average profit per hl of beer in China is USD 2 (measured in EBIT), a fraction of the global average of USD 19 per hl, said Glen Steinman, president of Seema International.

Besides, CR Snow’s push to sell more premium variants of its brand to boost margins has seen limited success. It still lacks a proper premium, preferably international premium brand. AB-InBev’s Budweiser brand has the lion’s share of this segment, while China’s Tsingtao Brewery also has a significant presence. And now, CR Snow, considered a mass-market brand, has to make an inroad into the segment without the marketing expertise of SABMiller.

The agreement with CRB is conditional on the successful closing of the USD 110 billion acquisition of SABMiller by AB-InBev as announced on 11 November 2015, which itself contains certain regulatory pre-conditions.