bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

urlAlias

moreOnThisArticles

sponsorType

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Mark O'Neill

TEN YEARS MAY be on the long side for a courtship that ultimately ended in a marriage of convenience. But both Tsingtao Brewery and the world's biggest brewer, Anheuser-Busch (AB), seem happy.

In selling a substantial share of its company to AB, Tsingtao gets to reduce debts acquired during a four-year buying spree and help run its sprawling new empire of 50 breweries. It also gains management savvy.

For AB, the deal marks a milestone in its attempt to penetrate the China market, the second-largest in the world after the United States - and the fastest-growing.

The deal was signed on Monday in New York, one of five major agreements made by Chinese and American companies on the eve of the arrival of President Jiang Zemin in the US for what is likely to be his swansong visit.

Under the deal, Tsingtao, China's biggest brewer, will issue US$182 million worth of bonds, which AB will convert into H shares in three stages over seven years, taking its share from 4.5 per cent to 27 per cent.

It will pay US$116.4 million at once and within 12 months the balance of US$62.5 million. All the shares will be tradeable in Hong Kong. The price was HK$4.68 a share, against a closing price of HK$3.60 on Monday.

The deal is subject to approval by the shareholders of the company, which has issued both A and H shares, and the Chinese government.

The deal will make AB the second-largest shareholder, after the Qingdao State Asset Management Bureau, with 30.56 per cent, and will give it seats on the board and management posts commensurate with its share ownership.

But, in a clause aimed at easing fears that the deal might lead to the death of the Tsingtao brand, AB agreed that, once its shareholding went over 20 per cent, the voting power of the amount above that level would go to the Qingdao bureau.

The deal was a landmark in a 10-year quest for a stake in Tsingtao by AB, whose global sales reached US$15 billion last year with 11 per cent of the world market.

High-level talks began with Tsingtao, the most famous brand in China, in the 1990s but they broke down because AB demanded a controlling stake.

As a compromise, in 1993, it bought a 5 per cent stake in the form of 45 million H shares, which fell to a 4.5 per cent stake after the company issued domestic A shares. It has retained the shares since then, resisting the temptation to sell them at their peak of HK$10 in 1994 and 1995, and a low of 60 HK cents, because it wanted to be a strategic investor.

During this time, the nature of Tsingtao changed dramatically.

In 1993, it had lost its place as China's top beer-maker to Yanjing Brewery of Beijing and did not make good use of the HK$1.6 billion raised from the Hong Kong listing.

The strategy altered with the arrival in 1996 of the charismatic Peng Zuoyi as general manager, who changed course, deciding that an offensive acquisition push was the only way to combat the 50-plus foreign brewers that had entered the market and end its reliance on the premium sector.

'We have wolves in front, tigers behind and many rats in the middle. We must eat the rats before we can attack the tigers' was one of his favourite sayings.

By the end of last year, the company had acquired more than 50 factories and 100 brands, raising its output that year to 2.51 million tonnes or 11 per cent of national output, up from 2.2 per cent in 1998, giving it a national presence and beers for the top, middle and low ends of the market.

'Such a rapid rate of acquisitions in so short a time, in the name of economy of scale, led to enormous financial pressure on the company,' said one industry analyst. 'In some cases, local governments brought breweries in trouble and asked Tsingtao to take them over. These were acquisitions arranged by government departments, not the market. Some were good and some were bad.'

So, while revenue increased dramatically, profits rose by a more modest margin. Debts mounted and so did the difficulty of managing so many factories scattered across China.

'When you put on red ballet shoes, you want to stop dancing but you cannot' was how Peng described it.

In the midst of this spree, Peng died in dramatic circumstances, at the age of 56, on July 31 last year. A lifelong swimmer who had excellent health, he went for a dip after work on a beach in Qingdao called 'the Old Stone Man', named after a rock in the sea. He had a heart attack and died before his driver pulled him out of the water. Doctors diagnosed exhaustion.

He was replaced by Jin Zhiguo, a 26-year veteran of the firm who had headed its operations in north China.

'The two men are quite different in character,' the analyst said. 'Peng is a pioneer, while Jin is more cautious. While Peng's acquisitions were good for the company, the time has come to slow down and manage well the existing businesses.'

Since taking over, Mr Jin has made two acquisitions. 'Monday's deal will end Tsingtao's shortage of capital and improve its ability to make premium beer,' the analyst said. 'It will also help it manage better its sprawling empire.'

For AB, the deal puts it ahead of the game in tapping the China market.

After buying the 5 per cent stake in Tsingtao, AB in 1995 bought 97 per cent of the Zhongde brewery in Wuhan for US$170 million, giving it a capacity of 250,000 tonnes a year and 10 per cent of the premium beer market.

Then it negotiated with China Resources on a beer joint venture but talks failed because AB demanded a controlling share. China Resources set up a joint venture with South African Breweries (SAR), with a 51:49 shareholding, which, through a buying spree, has become China's third-biggest producer, after Tsingtao and Yanjing.

To make matters worse, in July last year, SAR paid US$5.6 billion to Philip Morris for a 64 per cent share of Miller Brewing, making it the world's second-biggest brewer and giving it a 20 per cent share of the US market.

Monday's deal gives AB a measure of revenge against SAR and should position it well for a share of this large market. But it is extremely competitive and with too many manufacturers.

Last year, China produced 22.74 million tonnes, up from 22.31 million in 2000, but capacity is nearly 30 million.

'This means a waste of resources, large inventory and conditions for a price war,' said Zhang Dongyun, an economist in the research department of Tian Yi Securities.

'Only the top four companies have a capacity of more than one million tonnes, controlling about 30 per cent of the market, far below the share held by the biggest firms in rich countries. This makes it hard to stabilise the market and avoid vicious price wars.'

Graphic: anal25gbz



Building on a better brew