By Adam Jourdan and Denny Thomas
SHANGHAI/HONG KONG (Reuters) - A successful marriage between beer giants Anheuser-Busch InBev (BR:ABI) and SABMiller (L:SAB) would almost certainly have to be done without one of the jewels in SAB's crown: its 49 percent stake in China's biggest-selling beer brand.
That would mean the combined mega-brewer would have to forgo the huge distribution and bottling facilities held by SAB's China joint venture, CR Snow, a platform that would help it grow in the huge Chinese beer market.
"The big value of most of these (Chinese) brands is the bottling facilities and the distribution systems that they have," said Ben Cavender, Shanghai-based principal at China Market Research Group.
"With long-term brand building over the next few years having that access would be very big," he added.
ABI's attempt to tie-up with SAB would be up against two big obstacles in China, where SAB and its joint venture partner China Resources Enterprises (CRE) (HK:0291) make Snow, the world's biggest selling beer by volume.
Firstly, the change of ownership triggered by the deal would probably hand CRE the right to buy out SAB's stake, a right banking sources say CRE would likely be keen to exercise.
Even if CRE doesn't use that right, lawyers anticipate China's antitrust watchdog will be waiting in the wings to rule any deal must exclude CR Snow.
An ABI-SAB tie-up would boost the combined Chinese market share of ABI, which sells the premium Budweiser brand in China, and SAB to about 37 percent, lawyers say, raising competition issues.
In 2008, China's Ministry of Commerce (MOFCOM) approved InBev's $52 billion purchase of Anheuser-Busch but prohibited the two companies from increasing their stakes in domestic beer companies – including CR Snow - in a sign China would be sensitive about concentration in the domestic market.
"It is highly possible that MOFCOM may require SABMiller to divest its 49 percent equity (or at least lower its equity to not jointly control) in the JV with CRE as a condition to clear the transaction," Leon Liu, a Shanghai-based partner at law firm MWE China said.
China's commerce ministry, ABI and SAB did not respond to requests for comment.
CHINA'S TRICKY BEER MARKET
China's beer industry was worth around 486 billion yuan ($76.4 billion) last year from 291 billion in 2010 and is forecast to reach 683 billion yuan by 2019, research firm Euromonitor estimates.
But while the country accounts for a quarter of the world's beer volumes and a tenth of the revenues, it has only 3 percent of the global profit pool according to a recent research note by Deustche Bank.
That's led foreign brewers to focus more on the premium market, where margins are higher, rather than on mass market offerings.
"China's hope is on margin expansion and premiumization," Deutsche Bank (XETRA:DBKGn) wrote.
While ABI and SAB may be comfortable letting go of the low-margin Snow brand, losing CR Snow's facilities would mean they miss out on the valuable distribution network through which to market ABI's premium Budweiser beer to more towns and villages across China.
CR Snow owned around 100 breweries in China with a total annual production capacity of 155 million hectoliters of beer last year, according to Deutsche Bank.
That means if CRE opts not to buy-out SAB's stake, and China's antitrust watchdog forces a sale, then bankers expect huge interest from Chinese and foreign brewers.
SAB's share of CR Snow is valued at around $4 billion, and bankers say any sale could lead to a full-blown auction.
"This is a rare opportunity in a big market and everybody will step up," a senior consumer sector banker said.