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Bidding war for Harbin Brewery Group
(China)
Bidding war for Harbin Brewery Group
Question 1:
Did AB pay too much for a mature business?
We have to look at the strategic importance of this transaction, the competitive nature of
the bidding process, and the scarcity of such premium assets in China. For deep-
pocketed Anheuser, US$765 million was a fair price for the rare chance to grab control
of a major brewery with a 30 percent market share in China's northeast, a beer-happy
region that Anheuser's premium Budweiser brand has yet to penetrate in a big way.
Leading brewery Tsingtao, which has granted Anheuser an option to raise its current 9
percent stake to as much as 27 percent, can also benefit from Harbin's network.
Sukarnen
DILARANG MENG-COPY, MENYALIN,
ATAU MENDISTRIBUSIKAN
SEBAGIAN ATAU SELURUH TULISAN
INI TANPA PERSETUJUAN TERTULIS
DARI PENULIS
Untuk pertanyaan atau komentar bisa
diposting melalui website
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It is important to understand that the acquisition of Harbin is the scheme that fit into the
broad framework of AB’s overall strategic planning processes. The basic elements of
strategic planning include an assessment of AB’s environment and an analysis of AB’s
resources and capabilities as they relate to the environment.
AB International growth strategy targeting China
AB’s multinational beer strategy is simple : expand the Budweiser brand international
while entering into strong partnerships with top beer makers across the globe.
During the past five years, the Chinese beer industry has expanded more than beer
markets in Europe, North America and South America. Chinese per-capita beer
consumption is only 50% of that in Japan and Korea, and only 20% of that in developed
countries like the U.S. and Canada.
As part of its Brewery Acquisitions and Strategic Alliances, AB became one of the first
international beer markets in China when AB bought the Wuhan brewery in 1995. Since
then, Wuhan’s beer production has more than quadrupled to some 4 million barrels per
year.
In 2004, AB also acquired China’s fifth-largest brewer, Harbin, in northern China where
per-capita beer consumption is double China’s national average. Not only has AB made
Harbin’s brands available throughout most of mainland China, AB has launched Harbin
as an imported brand in the U.S. starting in 2006. Locally produced Budweiser and
Harbin brands are distributed to clients in Hong Kong a well as northern, eastern and
southern China.
In addition, AB also owns 27% of the Tsingtao Brewery, part of a key strategic alliance.
The Tsingtao Brewery is China’s largest domestic brewery and beer exporter.
China beer market growth
U.S. brewer AB is betting rising incomes and an aspiring middle-class in countries such
as India and China will boost its international revenues. International business makes up
less than 10 percent of AB’s total sales but is growing much faster than the U.S. market.
Said Stephen Burrows, chief executive and president of AB Asia-Pacific operations, “We
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have intention to grow in high-potential markets outside the U.S., and India and China
meet our criteria”. Easing regulations and a shift to premium brands will also help boost
profitability in these markets.
Beer is cheaper in China than it is in America, so these operations won't add much to
Anheuser's bottom line. Now if China becomes a wealthier country, Chinese workers will
be able to afford higher beer prices. This would lead to both higher revenues and higher
margins. There is no dominant brewer in China. Anheuser Busch may end up becoming
China's #1 brewer, which is pretty significant when we consider that China has 1.2 billion
people.
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Beer Consumption by Country (2004)
Rank
Rank
in
2003
Country
2004 2003
Total
consumption
(1,000 kL)
Breakdown
by
country
Year-on-
year
increase
Total
consumption
(1,000 kL)
Breakdown
by
country
1 1 China 28,640 19.0% 14.6% 24,995 17.3%
2 2 US 23,974 15.9% 0.9% 23,771 16.5%
3 3 Germany 9,555 6.4% -1.6% 9,711 6.7%
4 4 Brazil 8,450 5.6% 2.8% 8,220 5.7%
4 5 Russia 8,450 5.6% 11.1% 7,606 5.3%
6 6 Japan 6,549 4.4% 0.7% 6,500 4.5%
7 7 UK 5,920 3.9% -1.8% 6,030 4.2%
8 8 Mexico 5,435 3.6% 2.0% 5,328 3.7%
9 9 Spain 3,376 2.2% 0.9% 3,345 2.3%
10 10 Poland 2,670 1.8% -2.4% 2,735 1.9%
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11 11 South Africa 2,530 1.7% 3.3% 2,450 1.7%
12 12 Canada 2,183 1.5% 0.8% 2,165 1.5%
13 13 France 2,020 1.3% -4.6% 2,117 1.5%
14 14 South Korea 1,897 1.3% 2.0% 1,860 1.3%
15 15 Czech Republic 1,878 1.2% 2.1% 1,839 1.3%
16 18 Ukraine 1,729 1.1% 3.9% 1,665 1.2%
17 16 Italy 1,719 1.1% -1.5% 1,745 1.2%
18 17 Australia 1,678 1.1% -0.7% 1,689 1.2%
19 19 Colombia 1,658 1.1% 2.0% 1,625 1.1%
20 21 Thailand 1,595 1.1% 10.0% 1,450 1.0%
21 20 Venezuela 1,525 1.0% 2.5% 1,488 1.0%
22 25 Philippines 1,409 0.9% 15.6% 1,219 0.8%
23 23 Romania 1,302 0.9% 1.5% 1,283 0.9%
24 24 Argentine 1,281 0.9% 4.5% 1,225 0.8%
25 22 Netherlands 1,269 0.8% -1.8% 1,292 0.9%
Note: Total consumption volume in Japan includes that of beer, happo-shu (low-malt
beer) and new genre.
Worldwide total consumption volume (estimate):
Year 2004 2003
Amount 150.392 million kL (up 4.2%) 144.296 million kL
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Question 2 :
Because Harbin’s major competitor is controlled by SABMiller, will a price war likely to
result from the new competitive structure in the region? What will this do to Harbin’s
value?
To answer the question and its impact to Harbin’s value, we need to consider that :
there is still room for further growth in China’s beer market;
segmented markets provide further opportunities for M&A
brand recognition becomes the key for competitive advantage
Still Room for Further Growth in China’s Beer Market
Twenty years ago, beer consumption was not common among the Chinese, who stuck
with traditional alcoholic drinks like distilled spirits and rice wine. In 1986, China’s
Department of Light Industry announced that there would be a significant change in the
national development plan for the alcoholic beverage industry. At the same time, China
was beginning to shift from a state-run economy to a modern market economy as Beijing
unfolded plans for massive and wide-ranging economic reforms.
In the early to mid-1990s, beer consumption in the country rose to an estimated six to
seven liters per capita annually. With a continued rise in affluence, beer consumption in
the country of a now 1.3 billion population has already tripled to approximately 19 liters
per person and will continue to expand in the next decade. Separately, older people (the
majority spirit drinkers in China) are drinking less traditional spirits, replacing these with
beer due to its lower alcohol levels, thus reducing health risks associated with the
consumption of traditional spirits.
As the Chinese economy continues to grow, people will have increasingly more
spending power. Accordingly, with sustained economic growth and continued rise in
living standards, Chinese beer consumption is expected to grow at 12 percent in 2004.
Notably, China has surpassed the U.S. as both the world’s largest consumer and
producer of beer. But with a per capita consumption rate far behind other industrialized
countries (19 liters compared to 29 liters in Hong Kong, 42 liters in Japan, 44.5 liters in
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South Korea, 75 liters in Europe, and 84 liters in the U.S.), we see the market as having
much room for development.
Segmented Markets Provide Further Opportunities for M&A
As the world’s biggest beer producer, China has about 600 breweries with 1,500 brands.
The four leading Chinese beer companies are Tsingtao, China Resources Breweries
(CRB), Yanjing Brewery, and Harbin Brewery.
The beer industry in China is characterized by regional brands. In 2003, the top four
beermakers’ total market share in terms of beer production was only 36.2 percent. Local
breweries often monopolize a given region, but have minimal exposure in regions
outside their home. For example, Zhujiang Beer occupies about 60 percent of the
Guangzhou market, while its market share elsewhere is less than one percent.
However, this situation is slowly changing with the recent rash of M&A activities in the
industry. For example, Yanjing, the only leading Chinese brewery without foreign
investment, bought 38 percent of Huiquan Beer, a large listed Chinese brewer in July
this year. In 2003, the top 10 Chinese brewers occupy 54 percent of the domestic
market share, an 11 percentage points jump from 2002.
London-based SABMiller, maker of Miller Lite, holds a 49 percent stake in CRB. In
September, CRB acquired the China brewery assets of Australian company, Lion
Nathan. In 2004, SABMiller lost a bidding war for Harbin Brewery, China’s fourth-largest
brewery, to rival Anheuser-Busch. Also in September 2004, the world’s fifth largest
brewery, Denmark’s Carlsberg acquired 34.5 percent of Wusu Brewery in Xinjiang
Province, its fifth acquisition in China in 2004, completing its strategic layout in western
China. In November 2004, British beermaker, Scottish & Newcastle, the world’s sixth
largest brewer, completed its purchase of Chongqing Brewery, becoming its second
biggest shareholder with a 19.51 percent stake of its total equity.
Clearly, the trend is towards the consolidation of the industry into the control of a
handful of major companies.
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Brand Recognition becomes the key for Competitive Advantage
Of the 1,500 Chinese beer brands, there are very few premium names. Regional brands
usually use a single-brand strategy, meaning both high-end and low-end products from
the same brewery carry the same brand name. This strategy hurt many breweries
because consumers were not able to distinguish between top-quality and lower-end
products.
As a result, price wars became the only way to win consumers, hurting
profitability and destroying consumers’ brand loyalty. It is important to note that
Chinese consumers are highly brand conscious. And the more affluent the consumer,
the greater his or her need for association with premium products.
In this environment, being the (most) famous beer brand in China or name
recognition constitutes a valuable intangible asset, to form a strong national
brand. Being consumer recognition, will enable it to reach economies of scale with
relatively less capital, and gave it significant competitive advantages over its rivals.
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Conclusion : price war will not take place in near future BUT PRICE INCREASES
WILL BE LIMITED.
VALUATION
With a big component of the growth can be attributed to beer consumption increases,
while price increases will be limited, using P/E ratio as Harbin’s valuation measurement,
high P/E will not be sustainable in the long run, due to growing competition and
narrowing margins.
Question 3:
Exhibit C is Citigroup’s valuation of Harbin at the start of the bidding war. Analyze their
valuation of HK$6.02/share compared to the HK$5.58/share Anheuser-Busch finally
paid.
Harbin's future growth will depend on
2% growth due to inflation
0.58% growth due to population increases
0.9% China volume growth
1% growth due to profit margin improvements
For a total growth rate of 3.9%.
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Valuation Analysis:
Harbin's earnings yield (earnings per share / share price) is about 6.1%. I've looked
through about 10 years of data, and Anheuser's free cash flow has been about 90% of
its net income. However, during this period, the company was growing at a higher rate
(leading to high capital expenditures) and spent a lot of money on cost cutting. In the
future, I expect free cash flow to be slightly below net income. Perhaps 95% would be a
good estimate. This would give Anheuser an earnings yield of 5.8%. Adding this to our
3.9% growth estimate, we get an expected return of 9.7%. Different growth estimates
would lead to a different expected return, so let's look at a few scenarios:
If profit margins only contribute 0.5% to growth, we get an expected return of
9.2%. If margins contribute 2% to growth, we get an expected return of 10.7%.
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Suppose preferences shift away from beer and domestic volumes fall by 1% per
year. Profit margins would likely fall. Perhaps they would decrease by, say, 0.5%
per year. Then, the elements of growth would be: 2% annual price increases,
0.5% growth due to international operations, -0.75% growth due to volume losses
(volumes would fall by 1% in America, which represents about 75% of
Anheuser's volume, so the impact on growth would be -0.75%) and -0.5% growth
due to profit margin decreases. Our expected growth rate would be only 1.25%
per year, which would lead to a long term annual return of 5.8% + 1.25%, or
about 7%.
The company has gained market share pretty much continuously over the long
term (although this trend has reversed itself over the past year or two). In 1990,
Anheuser's domestic market share was 43.4%. In 2004, it was about 50%. This
equates to roughly 1% in growth per year. Due to the economies of scale
inherent in the beer industry, Anheuser's profit margins would increase more than
otherwise. If market share gains add 1% growth, and profit margin gains add 2%
(rather than 1%) to growth, then our expected return jumps to 11.7%.
If Anheuser's international operations show only 1% volume growth, our
expected return will fall by 0.3%, to 9.4%.
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