By Donny Kwok and Brenda Goh
HONG KONG/SHANGHAI (Reuters) - Heineken NV is buying a $3.1 billion stake in the firm controlling China Resources Beer, China's largest brewer, as the companies seek to tap a growing thirst for premium brands in the world's biggest beer market.
Heineken, the world's No. 2 brewer, will take a 40 percent stake in CRH Beer for HK$24.35 billion ($3.1 billion), giving it a strong distribution network in China and greater access to one of the world's fastest-growing premium beer sectors.
For CR Beer, the maker of the locally popular Snow beer, the deal is a way to crack into the foreign-dominated premium sector at a time when demand for lower-end brands has waned with Chinese consumers wanting higher-end beverages like craft beer.
"This (deal) will help accelerate CR Beer's Snow beer high-end strategy and achieve its goal to take a leading position in the premium market within 5-10 years," CR Beer's Chief Executive Hou Xiaohai told reporters on a conference call.
The Snow beer brand accounts for about 90 percent of CR Beer's total beer sales volumes but is almost exclusively sold in China. The company hopes to use Heineken's global distribution network to market the brand abroad.
Investors had initially toasted the news, pushing shares of CR Beer up more than 10 percent earlier on Friday. However, the company's shares later fell by as much as 2.7 percent.
"Practically, it really needs years to crack the market and to compete with the existing players," said Linus Yip, chief strategist at First Shanghai Securities.
DEAL DETAILS
The dominant players in China's premium lager market are Anheuser-Busch InBev and Carlsberg.
With the CR Beer deal, Heineken hopes to challenge AB InBev whose Budweiser far surpasses Heineken's lager in China's premium market, according to analysts.
Heineken had a 0.5 percent share of the China market by volume in 2016, according to data from research firm Euromonitor International, while CR Beer accounted for more than a quarter.
Under the deal with CRH Beer, Heineken will inject its three breweries in China into CR Beer. It will also license its Heineken brand in China, Hong Kong and Macau to CR Beer.
China Resources Enterprise will own the remaining 60 percent of CRH Beer and will also buy 5.2 million Heineken shares for 464 million euros ($537.5 million).
The combined transactions would result in a net investment of 1.9 billion euros ($2.2 billion) by Heineken, the two firms said in a joint statement.
Shares of the Dutch brewer rose 2 percent in early trade.
DISTRIBUTION, EXPANSION PLANS
Heineken sells its premium lagers Heineken, Tiger and Sol in China, along with cheaper local brands Anchor and Hainan Beer.
CR Beer's Hou said the company would use its extensive local distribution network to promote Heineken's brands and was contemplating bringing in other Heineken-owned brands not yet in China, though that was still under discussion.
The Chinese brewer also hopes to eventually expand Snow beer into overseas markets such as Southeast Asia, Europe, the United States and Australia through Heineken's network, he said.
The companies are conducting due diligence and will need anti-trust approval from China, a person with direct knowledge said, adding the deal is expected to be completed by year-end.
JP Morgan is advising Heineken, while China Resources has enlisted Nomura and UBS as advisers. The banks did not immediately comment.
Reuters reported in March that China Resources Beer was in talks to acquire Heineken's China business as it looks to expand its footprint in the premium beer market.
($1 = 7.8493 Hong Kong dollars)
($1 = $1.0000)
($1 = 0.8633 euros)
(Reporting by Donny Kwok and Kane Wu in HONG KONG, and Brenda Goh in SHANGHAI; Additional reporting by Pei Li in BEIJING and Rama Venkat Raman in Bengaluru; Writing by Anne Marie Roantree; Editing by Stephen Coates and Himani Sarkar)
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