DALIAN / HONG KONG -- Anheuser-Busch InBev Wednesday announced the termination of a joint venture in a Chinese brewery between SABMiller and China Resources Beer.
China Resources Beer will buy SABMiller's stake in the Beijing-based CR Snow brewing company for $1.6 billion. The sale clears the way for the completion of AB InBev's takeover of London-based SABMiller.
The deal, which removes a major regulatory obstacle to the takeover, will allow AB InBev to focus its operations in China on its own brands like Budweiser.
The move also sets the stage for a fierce battle between AB InBev, the world's largest beer company, and China Resources Beer, China's leading state-owned brewer, in the vast Chinese beer market.
The announcement of SABMiller's sale of its 49% stake in CR Snow, a joint venture run with China Resources Beer since 1994, was welcomed emphatically by investors. China Resources Beer's stock rose as much as 35% in Hong Kong on Wednesday.
Jeremy Yeo, an analyst at Mizuho Securities Asia, said investors reacted to the lower-than-expected price of the buy-out, which raised expectations that the Chinese company won't have to borrow much to finance the deal. Analysts had expected a price tag of as much as $3.6 billion.
The main reason behind AB InBev's decision to end the partnership was unquestionably its desire to obtain Chinese regulatory approval for its acquisition of SABMiller.
China Resources Beer, the nation's largest brewer, and AB InBev have a combined share of nearly 40% of the Chinese market -- the world's largest.
Since it made a formal offer to buy SABMiller in November last year, the Belgian brewer has shed several big brands to secure regulatory approval for the takeover, selling MillerCoors to Molson Coors and Peroni and Grolsch to Japan's Asahi Group Holdings.
Some industry observers have speculated that InBev has also been motivated by how it sees the Chinese market evolving, with one commenting that there are plenty of sound economic reasons for the Belgian multi-national to divest the venture, aside from the regulatory factor.
China's beer market has started shrinking after peaking in 2013, due partly to President Xi Jinping's anti-corruption campaign, which has cracked down on graft and profligate spending by officials.
CR Snow saw its net profit for December 2014 drop by about 20% from the previous year and is believed to have continued struggling to lift its bottom line in 2015.
The brewery does not sell any SABMiller brand beer, and the London-based company's stake in the joint venture is an almost purely financial investment for dividends, one industry executive pointed out.
As CR Snow's growth has started faltering, the investment has become less profitable.
Lifestyle changes among Chinese consumers, in particular the dwindling popularity of beer among young Chinese, mean the industry sees little chance of a significant upturn in demand, and slicing into a rival's share is one of the few ways a brewer can force growth in the market.
Despite tougher business conditions, InBev's own beer brands are fairing reasonably well in China, eking out an increase in sales in 2015 to 7.45 million kiloliters. Sales of its two mainstay brands in the country, the high-end Budweiser and the low-end Harbin Beer, remain strong.
China Resources Beer, in contrast, has been going through something of a rough patch. Sales of its staple product Snow beer, a 500ml bottle priced at around 2 yuan ($0.31), have been sluggish and the overall outlook is bleak.
The Chinese market has seen a growing shift in recent years, especially among young consumers, toward higher-priced brews, such as foreign brands and white beers.
With InBev freed from the burden of supporting the struggling joint venture, it finds itself in a strong position to capitalize on the trend. CR Snow's plight, on the other hand, is likely to continue for the time being.
China Resources Beer operates about 90 breweries around China, a legacy of its aggressive, acquisition-focused expansion in the past decade.
But these breweries, mostly aging facilities, are running at only around 50% of their capacity amid weak demand and major restructuring of its operations is required for the company to stay afloat.
In order to regain its edge, "China Resources Beer needs to streamline their production and distribution operations and develop premium products," said Yeo of Mizuho Securities Asia.
SABMiller's sale of its stake in the Chinese joint venture could also catalyze a fresh wave of cross-border consolidation as China Resources Beer may start looking for a new foreign partner.
Despite slowing growth, China's beer market remains twice as large as the U.S., the second largest in the world, and the company could look like an attractive partner for an overseas brewer.
China Resources Beer may also go on a shopping spree overseas to enhance its presence in emerging markets in Southeast Asia and Africa that could have an even bigger effect on the global beer industry landscape.