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    Southeast Asia
     Aug 15, 2012


Heineken, ThaiBev locked in beer brawl
By William Barnes

BANGKOK - In many of the best film dramas the MacGuffin - film makers' jargon for the desire driving the action - is obscure to the audience.

When global beer giant Heineken moved last month to buy out its partners in the Singapore-listed Fraser and Neave (F&N) Ltd brewing joint venture of eight decades, observers could understand the financial significance of a deal worth about US$6 billion. What most missed in the proposed blockbuster deal, however, was the MacGuffin.

The market consensus was that the proposed acquisition was a straightforward rejection of an asset play by Thai outsiders trying to buy into F&N, a conglomerate that owns 40% of Asia Pacific

 

Breweries (APB), which brews Tiger Beer and more than 40 others popular in Southeast Asia and sold in 60 countries.

But Heineken knew it had more to fear than that. The Dutch maker of beer first brewed in the 19th century was staring at the prospect of getting into bed, as investment bankers like to quip, with a man with a reputation.

In recent days, Thailand's rags-to-riches whiskey tycoon Charoen Sirivadhanabhakdi (via Kindest Place Groups, controlled by his son-in-law) made a counter offer for F&N's direct stake in APB, which would give it almost 16% of the brewer when combined with an earlier purchase. F&N, now a quarter-owned by Charoen, also has a half-share in a joint venture with Heineken that holds nearly 65% of APB.

The unexpected corporate punch, counter-punch and now retaliation is a reminder that personality and reputation still weigh heavily in the numbers-heavy game of global business. The last time Charoen joined hands with a global beer giant the relationship ended in frosty accusations and a $2.5 billion claim for damages once Thailand's "whisky king" had received what he wanted from his perhaps slightly naive Danish partner, Carlsberg.

Charoen dropped a heavy, unexpected stone in the rising waters of Heineken's ambitious expansion plans for Asia when his Singapore-listed ThaiBev bought almost a quarter of the venerable F&N in mid-July from the Singapore-based Oversea Chinese Banking Corp (OCBC). His son-in-law, Chotiphat Bijananda, simultaneously acquired an initial 8.6% direct stake in APB from OCBC, making for a combined deal worth around $3 billion.

This suggested the feisty, if publicly low profile, Charoen would control about 48% of APB, a major and highly profitable brewer in a region targeted as having massive potential by the drinks industry. (The latest offer for F&N's direct stake would strengthen his grip on the brewer, lifting his combined holding to around 48%.) Heineken also owns an about equal 42% of the venture through a similar combination of joint venture ownership and direct stake.

The recent move by the Thais to offer 10% more than the Dutch for F&N's direct stake in the brewer was viewed by the market as throwing a monkey wrench in the wider deal for either control or opportunistic profit.

Senior Heineken executives had already admitted they were uncomfortable with Japanese beer maker Kirin's 15% stake in F&N. But this irritation was nothing like the alarm bells that rang in the Netherlands when ThaiBev made its entrance.

The story behind this can be found a day's journey around the biting North Sea coastline to Denmark where, two decades ago, the strategic planners of its great rival Carlsberg congratulated themselves on landing the perfect local partner in the Thai man who made the notoriously potent Mekhong whisky.

At the time, experienced executives from the multinational conglomerate chuckled privately that Charoen's rough-diamond wiles that had served him so well in the fierce local Thai liquor trade would be placed at their service in the growing beer market. It didn't work out that way, however.

Rags to riches
Charoen was born in extremely modest circumstances, one of 11 children of ethnic Chinese parents in Bangkok in 1943. He was introduced into a group of well-connected Thais who possessed one of the rather archaic liquor licenses handed out on a zonal basis. In 1984, his business group won a clean sweep of all 11 regional liquor licenses that were offered up that year.

By then he was already powerful enough to ignore limiting liquor sales to within allocated geographic zones. There followed a fierce pricing war with his chief competitor until, in a move redolent of smoky back rooms, the two rival entities amalgamated in an arrangement that saw some several leading chieftains retire from the fray.

This left Charoen with a coterie of loyal associates and absolute domination of the hugely lucrative low-end segment of the Thai liquor business. He was already extraordinarily wealthy by this time.

Enter Carlsberg into the fray. The Danish were looking in the early 1990s for a forceful distribution channel for their iconic Carlsberg beer brand in the promising Thai market (Carlsberg was already number one in neighboring Malaysia) from someone who could also help to cover the bureaucratic flank.

Charoen, with unrivalled influence and impressive entrepreneurial momentum, seemed a perfect fit. The initial moves seemed promising. Charoen displayed his usual panache by insisting that if retailers wanted his hugely popular whiskey they also had to take some Carlsberg. The beer was subsequently pushed into all quarters of the country.

What happened next is still not entirely clear to outsiders. Carlsberg was marketed as a relatively expensive premium beer when Charoen's forte was undercutting his rivals with fiery concoctions.

Although it was technically a joint venture, the whiskey tycoon had reportedly driven a hard bargain and held the physical brewery. At some point he persuaded Carlsberg to let him use the "surplus capacity" in the brewery.

The Chang (Elephant) Beer that subsequently appeared in bars all over the country tasted similar to Carlsberg, albeit it was (as befits a Charoen brand) much stronger than ordinary beers. The bottles employed similar styling to Carlsberg.

By coincidence, the Danish giant had been making a strong drink called Elephant Beer for the European market for over three decades, inspired by the century-old elephant statues outside the company headquarters in Copenhagen.

Charoen used every tactic in his playbook to sell his beer at extra low prices so that he (thanks also to its useful placing as a low-tax budget beer) was able to undercut its chief rival, Singha Beer, which had historically dominated the local market.

Within a month of its launch, Chang was a storming success. Singha, on the other hand, was in a remarkably short time reduced to playing catch and inventing new "budget" brands of its own to try to fight back. The Thai beer market is now littered with competing low-end, high-alcohol content brews.

Chang's towering sales also cast a long shadow over the joint venture with the Danes. By 1999, Charoen was producing annually 607 million liters of Chang, compared with a paltry 17.4 million liters of Carlsberg.

The Danes made a final play to rejuvenate a joint enterprise that had become something of an embarrassment by bringing Charoen in under a Carlsberg Asia umbrella, with what looked like plans to cooperate in selling their beers to a regional market.

The experiment quickly failed. Observers say the two organizations were clearly mismatched both in temperament, instinct and corporate philosophy. Charoen, brought up in a hard school, was apparently not about to give up anything so precious as real assets in exchange for the more nebulous delights of associating with a global corporate brand.

In 2003, Carlsberg cut links with Charoen. The company's president, Nils Anderson, said in a statement issued at the time, "We have terminated the joint venture amongst other things because we are under the distinct impression that the character of the companies which Chang Beverages were to transfer to Carlsberg Asia does not correspond with what was agreed upon and that the value of these are disproportionate to the assets which Carlsberg Breweries has transferred to Carlsberg Asia.

"Carlsberg Breweries has spent much time and many resources trying to establish a dialogue with Chang beverages. However, the management of Carlsberg Breweries no longer believes that it is possible to establish a constructive cooperation on a reasonable basis and therefore we have decided to terminate the joint venture."

In 2005, Charoen won a lawsuit against Carlsberg for ending a joint venture with one of his companies, securing an award of $120 million in damages. He had initially sought as much as $2 billion. Carlsberg did not return to Thailand for nearly a decade. Charoen's children have in the meantime taken a more active role in the company and he is now widely respected as an efficient, if somewhat feared, businessman, recently ranked as Thailand's second-richest man.

His overseas beer sales have been modest, with less than 4% of Thai Bev's 2011 revenues generated outside of Thailand. The threat from his corporate counter attack on Heineken builds on an energetically acquired reputation for ruthlessness and success. Yet having a reputation for sharp elbows has its limits in the wider world where ultimately the drinks business is built on partnerships and image. This is one particular elephant worth watching.

William Barnes is a veteran Bangkok-based journalist.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


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