The Fight for Harbin Beer

By staff reporters Lu Yanzheng in Hong Kong, Zhang Fan in Harbin

largest purchasing war for a Hong Kong-listed company since the famous Hong Kong Telecom case in 2000. All eyes have focused on the fourth largest mainland brewery, which floated its shares in Hong Kong just two years ago with market capitalization of HK＄3 billion.

The two rivals who either reluctantly or intentionally joined the battle are the two leading brewery groups in the world -- Anheuser-Busch Limited (AB) and SABMiller PLC (SAB).

SAB, the world's second largest multinational brewery, became the largest shareholder of Harbin Brewery last June when it purchased a 29.6% stake in the Chinese brewery and signed an "exclusive strategic investor agreement." Harbin Brewery, however, announced the termination of the agreement on May 1, alleging that SAB did not fulfill its obligations.

On May 2, just one day after the announcement, AB took action. AB, the world's largest brewery and a traditional competitor of SAB, announced that it had purchased Global Conduit Holdings Limited (GCH), a company registered in the British Virgin Islands, at a price of HK＄ 1.08 billion (US＄ 138 million). Forty days before this announcement, GCH had purchased a 29.07% stake in Harbin Brewery from the original second largest shareholder.

Harbin Brewery was restructured from a state-owned enterprise. Even after the company's listing, the state retained some shares. Harbin Brewery's second largest shareholder was Harbin Brewery Factory (HBF) that registered in the British Virgin Islands. Hong Kong Guoli Development Corp, a window company of the Harbin Municipal Government, directly controlled HBF.

The two traditional competitors met on a new frontier at the Chinese brewery. SAB suffered from a sudden blow, but it reacted quickly.

On May 2, SAB adopted a bold move, notifying the board of directors of Harbin Brewery that it would make a general offer to purchase Harbin Brewery shares.

A general offer means that an investor makes an offer to all shareholders to buy shares at an offered price. According to Hong Kong rules, a large shareholder must make a general offer to other shareholders if its stake in a listed company exceeds 30% (the large shareholder can apply for exemption). SAB held a 29.6% stake in Harbin Brewery and thus was not obliged to issue a general offer. SAB, however, still announced the general offer in a bid to become the dominant shareholder of Harbin Brewery. In capital market acquisitions, a general offer without negotiation with other shareholders beforehand is regarded as "hostile takeover."

SAB offered an attractive price of HK＄ 4.3 (US＄ 0.55) per share, which was 33.3% higher than Harbin Brewery share's closing price of HK＄ 3.225 (US＄ 0.41 ) per share before trading was suspended at on April 30. Calculated upon the HK＄ 0.11 earnings-per-share, the offer price represented a price-to-earning ratio of 37.7.

The purchase could be worth HK＄ 4.3 billion (US＄ 551 million) considering the number of outstanding Harbin Brewery shares and could mark the largest hostile purchase in the Hong Kong stock market since 2000.

News of the offer energized the Hong Kong stock market. On May 5, the day the general offer was publicly announced, the price of Harbin Brewery soared by 45.7%, from HK＄ 3.22 to HK＄ 4.7.

Power of Uncertainty

SAB waited for a response from the other shareholders of Harbin Brewery. However, the management in Harbin Brewery and the Harbin government, the original second largest shareholder, criticized the hostile action immediately.

According to the Codes on Takeovers and Mergers and Share Repurchases by the Stock Exchange of Hong Kong, SAB has to deliver the general offer to other shareholders within 21 days from the announcement on May 5 and must obtain more than 50% of the shareholder voting rights. If more than 50% of shareholders accept the offer by SAB, SAB will unconditionally purchase all Harbin Brewery shares from other shareholders who are willing to sell at HK＄ 4.3 per share. It can declare success if it buys more than 50% of the shares. However, if SAB buys more than 75% of the shares, Harbin Brewery will be de-listed from the Hong Kong stock exchange as the public holdings will be reduced to less than 25 %. If SAB buys 90% of the shares of the Chinese brewery, it will be authorized to force the remaining shareholders to sell the remaining shares to make Harbin Brewery an exclusively funded company.

Shortly after the general offer announcement was made by SAB, the management of Harbin Brewery issued several press releases showing their opposition to SAB's general offer.

The Harbin Daily reported on May 8 that the Harbin mayor had "recently" talked with the AB president. The mayor was quoted as saying that "AB is the long-awaited partner of Harbin."

The frequent attacks of early May have quieted, and each side must now wait.

AB must wait for regulatory approval of GCH's equity purchase from the Harbin Brewery Factory. As the equity stake held by Harbin Brewery Factory consists of state-owned assets, the deal needs approval from the government. Yang Xiaoxing, the director of equity stake transaction department under the Harbin Municipal State-Assets Supervision and Administration Commission, said the deal has been submitted to Beijing for final approval from the State-owned Assets Supervision and Administration Commission of the State Council. It is still unknown if and when final approval will be granted.

SAB must wait for the response to its general offer from other shareholders. SAB has to buy at least 21% of the Chinese brewery shares on the market to ensure the success of the purchase. If it fails to buy a 50 % stake within 50 days from the time of the offer, the purchase will become conditional, and if it fails to buy a 50% stake within 60 days, the purchase will fail.

The price of Harbin Brewery stock has been volatile in recent sessions. On May 14 the closing price was HK＄ 4.775 (US＄ 0.61), or HK＄ 0.475 higher than the offer price, which indicates strong anticipation in the market for favorable results from the purchase battle.

The market speculates that AB (through GCH) has a good chance to get the regulatory approval. In fact, the Harbin Brewery has become a battlefield for the world's two largest brewery companies. Will SAB raise its offer price? How will AB respond -quit, sell or make a counter offer?

All shareholders of Harbin Brewery will likely have the opportunity to benefit from the battle between the two giants.

Competition between Harbin Brewery and China Resources Breweries

The Harbin Brewery has more than 1,000 employees. It is surrounded by trees in the Xiangfang District of an eastern suburb of Harbin city. Harbin Brewery has been producing beer for more than 100 years, and the name Harbin Brewery appeared as early as 1932. Its predecessor was a brewery run by Russians, which can be traced back to 1900.

The storm in Hong Kong seems to have had little effect at the brewery. Some employees in the plant told that they had no idea about and no interest in the equity stake war. In fact, they have sensed little change since the initial public offering of the Harbin Brewery in Hong Kong in June 2002. Their salaries have not been increased. According to 's random survey of a group of employees, including drivers and workers at the bottling line, their monthly salaries generally range from 700 to 1,500 yuan (US＄ 84.6 to 181) - a handsome income in the community.

The Harbin Brewery is a key company in the city. Statistics from Euromonitor, a European market research agency, showed that the national market share of Harbin Brewery is 4.3%, ranking fourth nationally. Though Tsingtao Brewery, the largest player in China's beer market, and Yanjing Brewery, the third largest player, could be considered as competitors of Harbin Brewery, its major competitor is China Resources Breweries, which is the second largest player in China, controlling a 10% market share. China Resources Breweries' headquarters are in Beijing, but its major targeted market includes the northeastern Chinese provinces of Heilongjiang, Jilin and Liaoning - the homeland and base of Harbin Brewery.

The strategy of SAB definitely does not focus on Harbin Brewery alone. The brewery giant holds a 49% stake in China Resources Breweries and purchased nearly 30% stake in Harbin Brewery from the previous largest shareholder China Enterprise Development Fund. In addition, it signed an "exclusive strategic investor agreement" with Harbin Brewery.

Graham Mackay, the executive president of SAB, said in a statement upon signing the agreement that SAB plans to develop local brands. He plans to consolidate the assets of Harbin Brewery and China Resources Breweries.

However, this mission has obviously proven to be difficult. "Harbin Brewery and China Resources Breweries are natural competitors, and it is impossible for the two rivals to join hands," an investment banker who is close to the Harbin Brewery told . In addition, Harbin Brewery is much smaller than China Resources Breweries in terms of assets. China Resources Breweries were incorporated in 1993 as a joint venture between China Resources Enterprise Ltd and SAB, and the company now controls 24 brewing plants through consecutive mergers and acquisitions, with a combined annual output capacity of 3.05 million tons. Harbin Brewery, however, currently owns only 13 brewing plants with an annual sales volume of 1.5 million tons.

More importantly, though, SAB is not the controlling shareholder in either of the two companies, and its management power is weak. Analysts widely said that the "consolidation" of China Resources Breweries and Harbin Brewery would be extremely difficult. It is nearly impossible for Harbin Brewery, which is in hands of "strong egos," to accept the consolidation.

After SAB's announcement of its general offer, managers of the Harbin Brewery publicly showed their resentment and disappointment about SAB's failure to coordinate the interests of Harbin Brewery and China Resources Breweries. In the corporate announcement dated May 7, Harbin Brewery said that its board of directors did not believe that the company's long-term growth should be linked with its major competitor China Resources Breweries. In the announcement, Harbin Brewery also pointed out explicitly that SAB, as a shareholder in both Harbin Brewery and China Resources Breweries, had failed to establish common interests between the two competitors. It added that neither the management nor the employees of Harbin Brewery would support the general offer by SAB.

Li Wentao, the 48-year-old chairman of Harbin Brewery and the president of Harbin Brewery Factory, held a meeting with workers on May 9. In the meeting, the management team explained to the representatives of the workers that SAB is a big shareholder of China Resources Breweries, a company that has competed against Harbin Brewery in recent years. The management did not support the general offer by SAB for the sake of the company's long-term growth.

Some might wonder why Harbin Brewery ever invited SAB as its major shareholder? Li Wentao, who is a 20-year veteran in China's brewery sector, should have seen the underlying problem clearly when SAB invested in Harbin Brewery one year ago. Why did Li and his management team support the deal with SAB and directly participate in the equity purchase?

As for the situation at that time, received two differing explanations from investment bankers who are familiar with Harbin Brewery and AB. A source close to Harbin Brewery told that the China Enterprise Development Fund, the previous largest shareholder, had contacted both SAB and AB. Harbin Brewery preferred AB to SAB, but AB showed little interest at that time and finally the equity stake was sold to SAB. However, another market source said that AB had intentions to buy into Harbin Brewery at that time, but SAB acted more quickly.

Factors Behind the SAB's Purchase

Judging from the viewpoint of the management team, the SAB equity deal seemed to be a classic "win-win" case.

Public statements showed that all the managing directors at Harbin Brewery, including Lu Jiaxing (Peter Lo), Li Wentao, Fu Hui, Bao Liusuo and Ou Zhihua (Peter Jeva Au), as well as the chief financial officer Lin Bangshui (Lam Pong Sui) had jointly registered a company in British Virgin Islands called Advent Strategic Ltd (Advent). The unit then formed a joint venture with SAB. This joint venture, called Gardwell, bought 295 million shares, for a 29.6% stake (which was recently diluted to 29.41%), in Harbin Brewery from China Enterprise Development Fund, the previous largest shareholder. The price per share was HK＄ 2.29 (US＄ 0.29) and the total price was of HK＄ 675.55 million (US＄ 86.68 million). SAB holds a 95% stake in Gardwell with the remaining five percent in the hands of Advent.

According to the Harbin Brewery announcement concerning the purchase, SAB should have paid HK＄ 95 million (US＄ 12 million) for the 95% stake in Gardwell, while Advent, which is controlled by Harbin Brewery executives, should have paid HK＄ 5 million (US＄ 641,000) for the five percent stake.

Statements show that Lu Jiaxing holds 27% of Advent, Li Wentao holds 23%, Fu Hui holds 19%, Bao Liusuo holds 10%, Ou Zhihua holds 18% and Lin Bangshui holds 3%.

Clauses in public statements include offers of "Put Options" to Advent. The "Put Options" require SAB to purchase the option stocks in hands of Advent for HK＄ 55 million (US＄ 7 million). The purchase will be carried out in two rounds, the first will be one year after the acquisition, and the second will take place before the end of the third year. It was also agreed that SAB would pay HK＄ 110 million (US＄ 14 million) to buy Advent's stake if SAB proposed a general offer for Harbin Brewery within three years or sold stakes in the Harbin Brewery or Gardwell.

With support from the management, SAB successfully bought into Harbin Brewery and signed an "exclusive strategic investor agreement."

However, SAB failed to take over management of the Harbin Brewery. SAB obtained rights to nominate two non-managing directors on the board, but the name list of managing directors of Harbin Brewery showed that Ou Zhihua, the executive president of China Enterprise Development Fund, was still a managing director. With the exception of the president Lu Jiaxing, all managing directors came from Harbin. In other words, the management did not change.

Because SAB initiated its general offer, its original agreement with Advent concerning "Options" must be exercised. Advent can require SAB to honor the agreement to pay HK＄ 110 million (US＄ 14 million). According to their stakes in Advent, Lu Jiaxing could receive HK＄ 29.7 million (US＄ 3.8 million); Li Wentao, HK＄ 25.3 million (US＄ 3.2 million); Fu Hui, HK＄ 20.9 million (US＄ 2.68); Bao Liusuo, HK＄ 11 million (US＄ 1.4 million); Ou Zhihua, HK＄ 19.8 million (US＄ 2.5 million); and Lin Bangshui, HK＄ 3.3 million (US＄ 423,420).

Harbin Brewery management denied any personal interest in the current opposition to the general offer. President Lu Jiaxing told the Financial Times on May 7 that their agreements with SAB exerted no influence on their decision-making. "All decisions of management were made according to corporate interests."

History of Harbin's Equity Structure

According to the corporate address of Harbin Brewery published on the website of Hong Kong Stock Exchange, its headquarters is located in the H/F Worldwide House, 19 Des Voeux Road Central, Hong Kong. The directory there shows that, Harbin Brewery, China Enterprise Development Fund Management Co Ltd which owns Harbin Beer's original largest shareholder China Enterprise Development Fund, and the fund management company's parent firm Sun Group, share the same office block on the 11th floor.

Upon arriving at the 11th floor, reporter was told that Harbin Brewery and China Enterprise Development Fund Management Co Ltd had moved away. Only Sun Group still operated there. Xie Guolin, a director of Sun Group and a former non-managing director of Harbin Brewery, declined 's interview request.

The history and structure of China Enterprise Development Fund are complicated. China Securities, a mainland-based brokerage house, was, until recently, the fund's promoter. A source with China Securities, who had worked for the fund before, told that the fund was established in 1994 or 1995 and was initially traded in Dublin, Ireland. The fund management firm was set up after the establishment of the fund, and the original shareholders included South Korea's Dawoo. Most of the shareholders quit, however, leaving Sun Group as the single shareholder. The dominating shareholder of Sun Group is Ye Zhaofu, a low-profile businessman. Few people outside of the investment community would have known him had it not been for his donation of a piece of precious relic from the early Spring and Autumn Period to the Shanghai Museum - Ye is a professional artwork and relics collector.

In 1998 and 1999, China Enterprise Development Fund (CEDF) purchased 52% of the shares of Harbin Brewery from the original foreign shareholder of Harbin Brewery Factory -- Hong Kong New Zhonggang Group.

In 2000, Harbin Brewery transferred the shares under its ownership to Harbin Brewery Factory (HBF) ( registered in the British Virgin Islands), a company owned by Guoli Development Corp. Guoli is the Hong Kong window company of the Harbin municipal government. At that point, Harbin Brewery officially became a "foreign-owned" company. But shareholders and managers in the brewery were still closely connected with domestic organizations.

On June 27, 2002, Harbin Brewery successfully listed in Hong Kong. Two of its major owners, CEDF and HBF reduced their ownership of the company to 39% and 33.5%, respectively. The other 27.5% was offered to the public.

Between July 2002 and June 2003, Harbin Brewery expanded its total number of shares from 880 million to 978 million. The stake held by Harbin municipal government through HBF was spread thinly to only 29.78% of total shares.

In June 2003, one year after Harbin Brewery was listed, major shareholders of the company were allowed to sell the shares they owned. CEDF sold its shares of Harbin Brewery as soon as it is legally possible.

On June 27, CEDF sold 295 million shares of Harbin Brewery to Gardwell, a company controlled by SAB, for HK＄ 675.5 million (US＄ 86.71 million). It is important to note that CEDF did not sell all of the Harbin Brewery shares it owned to Gardwell. In fact, before the deal with Gardwell, CEDF underwent a restructuring during which a company called Brewery Investors Ltd (BIL) became a new shareholder. In the steps followed, CEDF purchased back its shares held by BIL by paying 42.2 million of Harbin Brewery shares. Another 4 million of CEDF's Harbin Brewery shares were sold to other parties.

After its purchase from CEDF, SAB owned 29.6% (later diluted to 29.41%) of the shares of Harbin Brewery. The second largest owner of Harbin Brewery was indirectly the Harbin municipal government who owned 29.25% (later diluted to 29.07%) of shares. The two figures were very close, a fact which would later set the stage for the struggle between the two largest owners. Obviously, since it would be a close match, the result of the competition would heavily depend on the attitudes of smaller shareholders like BIL.

On March 20, 2004, the Harbin municipal government sold its Harbin Brewery shares to Global Conduit Holdings Limited (GCH) for HK＄ 947 million (US＄ 121.57 million).

The largest owner sold its shares one year after the company was listed, and the second largest owner soon followed suit. The whole process, including the ownership restructuring that took place before Harbin Brewery was listed, followed a carefully laid out plan. As an investment banker who took part in the underwriting of Harbin Brewery says: "Harbin Brewery designed its shareholding structure before listing with the sole purpose of selling the shares afterward. Everything was meticulously calculated."

Currently in Chinese mainland, most large sized breweries are controlled by one large shareholder. For example, Guangdong Holdings and China Resources Enterprise own 51% of the shares of Guangdong Brewery and China Resources Brewery, respectively. The remaining 49% is owned by Heineken and SAB, respectively. The only way for external capital to have a controlling share is to ask the current largest shareholder to sell more shares. Furthermore, major shareholders usually have agreements with strategic shareholders, whereby strategic shareholders have the priority to purchase shares sold by major shareholders. It is difficult, then, for a "third party" to obtain a controlling share. But the current shareholding structure of Harbin Brewery is such that the two major shareholders each control 30% of the total shares, and the public owns the remaining 40%. The situation provided the right circumstances for an acquisition battle.

GCH's function
Global Conduit Holdings (GCH), which will purchase the 29.07% of Harbin Brewery's shares owned by HBF at a price of HK＄ 947 million, is a company registered in the British Virgin Islands. Presently, the signed contract is waiting for approval from the Chinese government. As its name suggests, GCH functions as a conduit company.

Initially, SAB did not pay much attention to GCH. An insider says that the Harbin municipal government talked with SAB before the government sold its shares to GCH.

It is said that SAB insisted upon buying the Harbin municipal government's shares at the same purchase price as the previous year, i.e. 2.29 yuan (US＄ 0.28) per share. In comparison, GCH later offered a price of 3.25 yuan (US＄ 0.39) per share, 42% higher than SAB's offer.

"SAB misjudged the situation. The company thought that AB had given up the chance to control Harbin Brewery," says an investment banker close to Harbin Brewery.

As the investment banker says, when Harbin municipal government decided to sell the shares it owned, SAB had at least two opportunities to prevent AB from ever having the chance to compete. The Harbin municipal government and GCH both attempted to negotiate with SAB. The negotiations in both cases broke because of disagreements on the purchase price. An investment banker guessed that SAB reasoned in the following manner: If SAB maintained its position as the only strategic investor, GCH, as a financial investor, could not pose any threat to SAB's expansion strategy. At the same time, SAB could choose a proper time to purchase the shares owned by GCH at a more advantageous price. SAB's final objective was to take control of Harbin Brewery.

Of course, GCH did not expect that Harbin Brewery would later terminate its strategic investor agreement with SAB. AB, as SAB's competitor, quickly moved in to take over GCH through which it would purchase the shares owned by the Harbin municipal government. SAB was forced to launch an overall acquisition bid at a higher price.

The portion of Harbin Brewery shares that GCH purchased were overseas state-owned shares, not red chip shares nor H shares. Yang Xiaoxing, the director of equity stake transaction department under the Harbin Municipal State-Assets Supervision and Administration Commission, said the deal has been submitted to Beijing for final approval from the State-owned Assets Supervision and Administration Commission of the State Council in accordance with the Management Methods of Oversea State-owned Asset "This is the first case of its kind in China," she comments.

In the two months spent waiting for judgment on the plan's approval, GCH, the "third party" has maintained a low profile. In public documents, GCH is owned by a group of investors, and no single investor owns more than 20% of the shares.

"In April, GCH actively talked with SAB, AB and another potential buyers on the issue of selling the shares it owns," says an insider. In fact, the only assets of GCH are its shares of Harbin Brewery. The mother company of GCH, Capital Select Enterprise Ltd., fully owns GCH and is registered in the British Virgin Islands. It is obvious that those in control of GCH are ready to sell the company's shares of Harbin Brewery.

Mysterious Intermediate

Interestingly, the persons behind GCH who decided to buy shares of Harbin Brewery at a high price must have known that the "single strategic investor contract" between SAB and Harbin Brewery would be effective for three years. This means that new strategic investors could in no case challenge SAB's position in the near future. It is reasonable, then, for outsiders to guess that GCH must have known beforehand that Harbin Brewery would unilaterally terminate the contract. Otherwise, how could GCH believe that it would be able to quickly sell the shares it bought to AB?

In fact, the contract between SAB and Harbin Brewery not only clarifies SAB's position, but also requires that SAB does not purchase any more of Harbin Brewery shares. The result is that total shares of SAB and its partners could not be over 29.7% of the existing shares of Harbin Brewery (not including the dilution effect caused by issuing of new stocks). Therefore, it is understandable that Harbin municipal government might choose to sell its shares. But what reason did GCH have to buy the shares?

An investment banker close to AB says that this is "the risk that GCH, as a financial investor, must take." Those in control of GCH, it would seem, must either be extremely skilled or extremely lucky.

On May 1, Harbin Brewery unilaterally terminated its strategic cooperation contract with SAB. It is said that AB immediately started negotiation with GCH, working until 3 am.

On May 2, AB announced that it would acquire GCH from Capital Select for HK＄ 1.08 billion (US＄ 138.6 million).

The GCH's bid price for the Harbin municipal government's shares was HK＄ 947 million (US＄ 12.157 million). If the trade between GCH and Harbin is approved, Capital Select, the lucky intermediate, could earn HK＄ 131.2 million (US＄ 16.84 million). After the transaction, the controller of GCH will be AB. Capital Select and its mysterious owner will not have to reveal its true face to the public.

Perhaps hoping for a cleaner deal, Capital Select has decided to voluntarily liquidate after the transaction is done, giving all the hundreds of millions of HK＄ it may earn in the transaction to its shareholders. These shareholders of Capital Select will not need to show themselves at any point during the entire transaction.

Who, then, are these unknown shareholders? David Webb, a famous analyst in Hong Kong, pointed out that two men named "Philip Kan Sung Chee" and "David Lee Sun" are board members of GCH and Capital Select, respectively. But it could not be proved that these two men are the terminals of the complicated transaction.

The Heated Competition

After an overall acquisition bid, SAB has to send out relevant documents to all other shareholders within the 21 days after May 5. And SAB must win 50% of the shares votes within 28 days. It will not be an easy task.

Before SAB sent out the bid, it contacted JP Morgan Chase, Capital Group and other institutional investors, trying to buy the shares they own. Their efforts failed, however.

The two above-mentioned institutional investors together held about 5% of Harbin Brewery shares at the beginning of 2003. Since then, they have continued to buy shares in the market, and now hold 8.16% and 7.91% of Harbin Brewery shares, respectively. Between May 7 and May 13, JP Morgan Chase sold some of its shares on the market at a price higher than the bid price of the overall acquisition. Market rumors went that it was possible that SAB will raise the bid price, but an investment banker close to the deal says that he does not believe that SAB will do so. "If SAB fails in the acquisition, it could sell the shares it owns and still make a profit. What SAB needs to do is to set a bottom price, making it very costly for its competitor to take control of Harbin Brewery," he says.

Officials in the state-owned asset management commission of the State Council say that the principle for its approval of state-owned shares sales is to ensure that state-owned assets will not depreciate but increase in value after the transaction. There is no strict time requirement for them to make a decision.

The selling price of the shares by Harbin municipal government, HK＄ 3.2 (US＄ 0.41) per share, is much higher than the net asset per share of Harbin Brewery. The deal is constrained only by the "Overseas State-owned Asset Management Method," which requires that the State Council approve the transaction. It seems likely that the deal will ultimately be approved. Nevertheless, details concerning the transaction are vague, and the state-owned asset management commission may want to investigate further. We may need to wait a long time before a final decision is made.

Translation by Zhang Fan and Zhou Wei