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Tsingtao sale could reshape China's beer market

Japan's Asahi unloads stake after learning 20% is not enough

Major breweries in China have been eyeing Asahi's stake in Tsingtao since its planned sale was announced in October.

DALIAN, China -- After more than eight years of trial and error, Asahi Group Holdings has decided to sell its stake in Tsingtao Brewery. The chance to buy into China's second-largest brewery has piqued the interest of several major players.

Entering the race are China Resources Beer, China's No. 1 brewer and Carlsberg, which holds the No. 5 position. Whichever company comes away with the prize, however, will likely face the same challenges as Asahi.

The Japanese brewery learned the hard way that being a minority stakeholder in a Chinese state-backed enterprise does not always open doors.

Asahi bought 19.99% of the outstanding shares in the state-backed company for some $667 million from Anheuser-Busch InBev, the world's largest brewery group, in 2009.

Chinese media had been speculating from January this year that the Japanese brewery was preparing to unload its stake. Asahi officially announced the plans in October.

Tsingtao's market value has more than doubled since 2009. If Asahi were to sell its entire stake, it could fetch nearly 200 billion yen ($1.75 billion).

The Chinese brewer's performance of late has hardly been encouraging, having been hit hard by slumping beer sales in the country. Nevertheless, the company commands a 20% share of the world's largest beer market, making the opportunity hard to ignore for the country's major breweries.

Hou Xiaohai, CEO of China Resources Beer, said he was "interested" at a news conference in March. The market leader has already secured financing for the purchase, which, if successful, would create an alliance controlling over 40% of China's beer market.

Danish brewer Carlsberg also appears keen. With Tsingtao unlikely to try and buy back its shares, the battle looks set to involve these two.

But it remains unclear how much the eventual buyer will be able to benefit from any synergy.

Real value

"The deal is a good investment, but from the operational aspect, we have our work cut out to make it bear fruit," was the feeling expressed by Asahi executives soon after the stake was bought. At the time, the Japanese company was desperate to improve its China operations and collaborating with Tsingtao was a core part of its strategy.

Asahi began providing technical assistance to its Chinese partner and started contract manufacturing Tsingtao-brand beers at its factories, trying to raise the capacity utilization and rein in losses.

Another goal was to push its signature Asahi Super Dry beer in China by making the most of Tsingtao's sales network. But 20% ownership of the state-backed company was not enough to guarantee success, even if Asahi was the No. 2 shareholder.

The Super Dry plan barely got off the ground as tensions between the two countries rose after the Japanese government purchased three of the Senkaku Islands, which are known as Diaoyu in Chinese and claimed by Beijing, in September 2012. Moreover, in June of that year, Tsingtao suddenly announced it would enter a business partnership with Asahi's rival Suntory Holdings.

Tsingtao appears to have been far more astute than its Japanese partners. It was able to acquire factories and other assets from Suntory before terminating the alliance. Now, Asahi has concluded that the partnership is no longer likely to be of any benefit. In the end, Tsingtao walked away as the winner from both deals.

Any potential buyer will have two key targets: getting Tsingtao to perform better and finding synergies with its own operations. 

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