Tsingtao Beer, China's second largest brewer, said yesterday it would buy Jinan Beer, a beer producer from Shandong province, for 250 million yuan. Analysts said the move was a way to fend off archrival Snow in the fight for the nation's beer market.

Tsingtao said it had signed a contract with Shandong Commercial Group to buy its subsidiary, which has an annual beer output of 300,000 kiloliters and 1.08 billion yuan in total assets.

Jinan Beer has a 30 to 40 percent market share in Jinan, the provincial capital of Shandong, and the deal, when finalized, would help push up the share that Tsingtao Beer has in Shandong to 80 percent, analysts said.

Under the agreement, Tsingtao Beer will buy just the regional brewer's brand and its sales channel while the Shandong Commercial Group will set up a new entity which would retain Jinan Beer's staff and factories. Analysts said this model would help Tsingtao save on money and time when finalizing the deal.

Shandong province has been the largest beer consumption market nationwide, accounting for 10 percent, followed by Guangdong and Jiangsu provinces.

"You cannot be a real leader unless you take over Shandong," said Teng Wenfei, beverage analyst at Shanghai Securities.

The efforts that China Resources Snow Breweries (Snow), China's largest brewer, have made since late last year to enhance its competitiveness in Shandong have also compelled Tsingtao Beer to rush in for the deal, analysts said.

In March, Snow said it had made an offer to acquire Shandong-based Amber Breweries (Amber) for 285 million yuan. The company also said it would inject 54 million yuan to upgrade Amber's production facilities to raise annual output to 300,000 kiloliters from 270,000 kiloliters.

Snow had no factories in Shandong prior to the deal. In April, Snow announced that it would invest another 350 million yuan to build a new brewery in Yantai with an annual output of 200,000 kiloliters.

"Snow's output expansion is quite a concern for Tsingtao which holds a dominant position in Shandong, and so the company had to fight back," said a beverage analyst on condition of anonymity.

It is estimated that Tsingtao has a 40 percent market share in Shandong. According to Tsingtao's 2008 financial report, out of its total sales of 15.78 billion yuan, about 61.48 percent, or 9.7 billion yuan, came from Shandong alone.

The financial crisis has not only felled some small Chinese breweries, but also caused a wave of mergers and acquisitions in the industry. Before the Amber deal, Snow purchased three regional brands located in Anhui, Zhejiang and Liaoning provinces for a cumulative 749 million yuan.

Tsingtao would probably conduct more M&A deals this year, Zhu Weihua, a beverage analyst at Merchants Securities, was quoted by the Economic Observer as saying. "It's a trend," he said.

The Chinese beer industry began to show signs of recovery this year after months of decline in growth last year.

(China Daily June 9, 2009)