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Mark O'Neill

The firm pays more than 500 million yuan to become the second-biggest shareholder in the 'Big Six' brewer

Scottish & Newcastle, Europe's largest brewer, has paid more than 500 million yuan to become the second-largest shareholder in one of the mainland's six biggest brewers.

An announcement in the official Shanghai Securities News said Scottish & Newcastle had bought 50 million state shares in Chongqing Brewery at 10.5 yuan each for a stake of 19.51 per cent, making it the second-largest shareholder after the Scottish & Newcastle, which has 88.55 million shares or 34.55 per cent. Chongqing Brewery listed in Shanghai in October 1997.

The agreement needs the approval of the State Asset Management Supervisory Committee and the Ministry of Commerce before it can take effect.

The acquisition is part of Scottish & Newcastle's strategy to move into emerging markets away from its core business in Britain and France, where it is the No1 brewer with brands such as Foster's and Kronenbourg.

With Carlsberg Breweries, it jointly owns Baltic Beverages Holding, which has a majority stake in Baltika, Russia's biggest brewer.

Chongqing Brewery spokesman Deng Wei said the deal was a culmination of 10 years of co-operation between the two firms, with the British company having provided technology, brewing experts and brands.

'This is the first time it has provided equity. Under current laws, a foreign investor cannot buy tradeable A shares [except through the qualified foreign institutional investors scheme]. So it has to buy state shares. [Scottish & Newcastle] has no plan to take a majority stake,' Mr Deng said.

The high price of the acquisition surprised analysts because the net asset value of Chongqing Brewery is just 2.5 yuan.

Song Jianghua, an economist with Nanfang Securities, said the price of 10.5 yuan a share was one of the highest paid to acquire state shares, compared with the lowest price of the A share this year of 9.8 yuan and Thursday's close of 14.15 yuan.

'The share price does not reflect the full value of the company, especially its potential and the worth of the southwest region where we are based,' Mr Deng said.

'We are a rare commodity, a big Chinese brewer that has no foreign equity share. Our brand is worth a great deal,' he said.

He said beer output for the whole group last year was 750,000 tonnes, of which the listed vehicle accounted for 380,000 tonnes.

'The group ranks fourth to sixth among Chinese brewers, after Beijing Yanjing Brewery, Tsingtao Brewery and China Resources,' Mr Deng said.

In the first nine months, the listed vehicle produced 360,000 tonnes, which it sold in southwest China, Hunan and Zhejiang.

Scottish & Newcastle has been more cautious than its foreign rivals in entering the mainland market, where many have lost their shirts.

In a memorandum to the Foreign Affairs committee of the British Parliament in 2000, the company said it had concentrated single-mindedly on developing a strong relationship with Chongqing Brewery. 'Our involvement with China is extremely modest and deliberately so,' it said.

'In contrast to any of the other international breweries, we have adopted a very individualist and different position.

'Other companies entered China on the back of often massive capital investments, few of which have thus far borne any significant fruit.'

It is government policy to encourage state firms to reduce their share of equity in non-strategic sectors.



Scottish & Newcastle buys Chongqing stake