Morningstar | CR Beer Agrees to Acquire Heineken's China Operations; Our HKD 23 FVE Unchanged
No-moat China Resources Beer, or CR Beer, has signed a strategic partnership agreement with the world's second-largest brewer Heineken NV on Aug. 3 to acquire Heineken's current China operations, including three breweries, and use the Heineken brand on a long-term exclusive basis in China for HKD 2.35 billion. Under the agreement, Heineken will take a 40% stake in CRH Beer, the majority shareholder of CR Beer, for HKD 24.35 billion. Meanwhile, China Resources Enterprises, the owner of CRH Beer, will also buy 0.9% of Heineken shares for EUR 464 million.We think this partnership is a win-win deal for both CR Beer and Heineken, as the two companies thirst to expand their footprints in the world's fastest-growing premium beer market. Despite having the largest market share in China, CR Beer has been recognized as a lower-end brand compared with its major rivals, Tsingtao and AB InBev. Heineken's average selling price is about two to three times that of CR Snow beer in China. The management believes the Heineken brand will immediately enhance its premium beer portfolio and strengthen its premiumization strategy. It also expects to grab meaningful share in the premium sector in the longer term (five to 10 years).
Heineken has entered China since 1983, yet to expand beyond its limited reach in the country's south, only owns less than 1% market share by volume. The partnership will allow Heineken to own 20.7% of CR Beer's shares indirectly and significantly expand the Heineken brand availability in China through CR Beer's strong distribution network to fully leverage the brand's potential.
The transaction is under due diligence and will need approval from the Chinese government, which is expected to compete by the end of 2018. Given the lack of detailed financial information at this stage, we maintain our fair value estimate for CR Beer at HKD 23 per share. However, we will revisit our model once more detailed information is announced.
China Resources Beer Holdings Company is a property investment and investment holding company. Co. is principally engaged in retail, beverage, and food processing and distribution, textile and property investment businesses. Through its subsidiaries, Co. is engaged in supermarket operations; wholesale of merchandise; wharf and godown services; manufacturing and distributing beer products; distribution of fresh, live and frozen foodstuff, abattoir operation, acting as food agent; marine fishing and provision of ship stores and fishing supplies; and financing.
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