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.
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