State-owned China Resources Holdings on Tuesday offered to buy the non-beer assets of its Hong Kong-listed subsidiary China Resources Enterprise for HK$28 billion ($3.6 billion), a move which will transform the latter from a conglomerate to a pure-play brewer.
The assets to be sold include China Resources Enterprise’s retail businesses such as Vanguard, Pacific Coffee and Ole which span over 4,600 retail stores across China as well as its consumer and beverage business.
The deal is the latest example of a conglomerate streamlining its business. Elsewhere, Hutchison Whampoa is in the midst of merging with Cheung Kong Holdings and the merged entity will spin off its properties business in a separate listing.
“The proposed transaction will unlock the value of our market leading beer business from the previous conglomerate structure and remove the uncertainties around the complex restructuring required in the non-beer businesses from CRE’s [China Resources Enterprise's] public shareholders,” said Chen Lang, chairman of China Resources Enterprise in a release.
Amid a slowdown in China’s economy, the non-beer business has been a drag on China Resources Enterprise, which posted a net loss of HK$161 million in 2014. The assets to be sold posted a net loss of HK$1.2 billion for the financial year ended December 2014, a turnaround from a net profit of HK$1.3 billion during the previous financial year.
As these non-beer assets are not expected to turn profitable in a hurry and would need to be restructured, the plan is to keep them unlisted, a source familiar with the matter said.
While having a conglomerate structure can help smooth out lumpy earnings, with better performing units offsetting ailing units, it can also make it difficult for investors to properly evaluate the business.
“It’s a perennial question: are you better off as a conglomerate where you can manage risks across different assets and sometimes you have synergies [across different businesses]?,” Torsten Stocker, a Hong Kong-based partner for consumer retail practice at consultancy firm AT Kearney told FinanceAsia.
“But when you look at the beer market in China and the level of competitive intensity, it’s probably better to focus on that and not be distracted. It probably makes it easier for investors to see the [company's] story as a beer business,” he added.
China Resources Enterprises shareholders applauded the move on Tuesday, sending the stock rising 55% to HK$23.65 in the afternoon from the previous day’s close.
China Resources Enterprises flagship Snow brand was the best-selling beer brand by volume in China in 2014, with a market share of about 24%. It has a joint venture with UK-based multinational SABMiller to develop the beer business in China. As at end 2014, it operated 98 breweries in China, which is the largest beer market in the world by volume and the second largest by value.
The move is part of a push to reorganise China's state-owned enterprises to improve operational efficiency. According to a second source familiar with the matter, it is being driven by the group’s new chairman, Fu Yuning. Last year Fu stepped in to replace Song Lin who was removed from his post in an anti-corruption probe by Chinese authorities.
Partial offer
As part of the proposed deal, China Resources Enterprise will return the cash from the sale to its shareholders, paying a special dividend of HK$11.50 per share. China Resources Holdings has also proposed buying a partial stake of up to 10% of China Resources Enterprise's shares, or 20% of its public float, at an offer price of HK$12.70 per share.
Together with the cash dividend, this represents a price of HK$24.2, a 59.2% premium to China Resources Enterprise's last closing price.
Partial offers are rare in Hong Kong and according to the second source, it helps crystallise value of China Resources Enterprise.
"China Resources Holdings feels that China Resources Enterprise is undervalued and they also want to crystallise some value for investors that may want to exit," the source added.
China Resources Holdings owns an indirect stake of about 51.8% in China Resources Enterprise and is expected to receive about HK$14.4 billion from the special dividend, based on its stake in the company. China Resources Holdings will pay for the non-beer business with HK$13.6 billion ($1.8 billion) in cash and the rest through a promissory note.
The disposal is subject to independent shareholders approval and bank and third party consents. Bank of America Merrill Lynch and Morgan Stanley are financial advisers to China Resources Holdings and UBS advised China Resources Enterprise.
