Punch-drunk over Harbin Brewery

The recent hostile takeover battle for Harbin Brewery Group tells us a great deal about what is - and is not - possible in China's lurching campaign to privatise state-owned enterprises (SOEs).

Over the past six years, many state enterprises at the city and county level have been sold to private investors, or to company managers and employees. But SOEs at the provincial and national levels, which account for the vast bulk of state business assets, remained almost untouched by this process. Of the biggest 500 Chinese companies, 368, or 74 per cent, are state-owned or state-controlled. It now seems clear that Beijing would like to accelerate the process of privatising mid-sized SOEs, while holding tightly onto the big ones. Harbin Brewery gives some hints as to how this might happen, but also shows the many obstacles in the way.

Harbin Brewery is of significant size, being the nation's fourth-biggest brewer. In mid-2002 it listed 42 per cent of its shares on the Hong Kong stock exchange, leaving 58 per cent in the hands of the city government.

What has happened since shows that even when a government shareholder is fully committed to privatisation, the process is unlikely to be straightforward.

In the middle of last year, South Africa-based brewer SABMiller acquired half of the city's remaining stake in Harbin Brewery, or 29 per cent of the company. This deal was only possible because of a new rule, in November 2002, that legalised the purchase of non-tradeable state-owned shares by foreign investors.

When SABMiller bought in, company management got a juicy bonus: a small slice of the SABMiller shareholding, with an option to sell the shares back to SABMiller at 10 times their effective purchase price, providing the company met certain financial targets. Moreover, SABMiller promised that if it made a general offer for the company, management could exercise their option immediately, for up to a double payout - 20 times the original, effective purchase price.