SABMiller’s China venture to buy out Sichuan minorities for USD 320 million

SABMiller’s Chinese venture, in which SABMiller has 49 percent, plans to pay USD 320 million or USD 42 per hl to buy the shares it does not own yet in the leading brewer in China’s Southwest.

CR Snow, a joint-venture between SABMiller and beverage-to-retail conglomerate China Resources Enterprise, intends buy 38 percent in Sichuan Breweries and the Blue Sword trademark, to finally gain 100 percent in the company which owns 14 breweries sprinkled across Sichuan province and all of a brewery in Guizhou.

The remaining 62 percent of Sichuan Breweries is already held by CR Snow.

Andre Parker, the managing director of SABMiller Africa and Asia, was reported as saying: "This acquisition further demonstrates CR Snow’s commitment to invest in prominent local brands, which not only complements our national branding strategy but strengthens our leading positions throughout regional markets in China."

The acquisition is expected to boost CR Snow’s operational efficiency and strengthen its brand portfolio. According to the SABMiller announcement, Sichuan province has a population of 87 million people.

SABMiller claims that Sichuan Breweries has a market share of roughly 70 percent in the province and is well positioned to capitalise further on increasing demand, with additional capacity production facilities planned. Beer consumption in the Sichuan province is comparatively low at about 12.6 litres a year against the national average of 23.4 litres.

The acquisition of the minority shares points to CR Snow’s objective of owning 100 percent of its Chinese operations, which gives management greater flexibility to promote its strategy of nurturing a regional brand while also promoting Snow beer as a national brand.

An indication of the growing profit prospects that are expected from a consolidated Chinese beer market is apparent in the higher prices that are paid for new acquisitions. In this latest purchase CR Snow is paying USD 320 million for assets that generated an attributable net profit of USD 12.4 million in the year to December 2005.

Market observers in South Africa were amazed to note that this purchase puts the price to earnings rating at about 16 times. They argued that, in terms of volume, CR Snow is paying the equivalent of USD 42 per hl. This compares with the long-term average of USD 25 to USD 35 per hl that CR Snow has paid since 1994 to build its position as the largest beer group in China, it was observed.

SABMiller says that the joint-venture raised output by 27 percent in 2006 to between 45 to 50 million hl, partly through acquisitions. It has a countrywide market share of 14.9 percent, followed by Tsingtao with a market share of 13.8 percent at the end of June 2006.

A recent fact sheet published by Hong Kong-based industry consultants Seema points out that in 1997 the top 10 brewers in China controlled only 19 percent of the market. This increased to 39 percent by 2000 and 68 percent by last year.

Acquisitions have been a major factor in this consolidation. Seema estimates that nearly USD 3 billion has been spent on acquisitions between 2002 and November 2006. The average price of those transactions was USD 43 per hl.

SABMiller expects its Chinese beer Snow to become the group’s biggest brand in 2006 and one of the world’s top four beers, but executives are said to concede that expanding profits will take time because a 640 ml bottle of beer can sell for as little as the equivalent of 12 U.S. cents.

CR Snow now accounts for nearly a fifth of SABMiller’s global beer volumes but less than 5 percent of profits.

Analysts estimate Snow volumes could have hit 26 to 27 million hl in 2006, ahead of Miller Lite, which had volumes of 22 million hl in 2006, and probably behind only Budweiser, Skol and Corona Extra in global rankings. Photo: SABMiller