Carlsberg has offered to purchase another 30.3% stake in Chongqing Brewery Company (CBC) 600132 for DKK 2.65 billion (USD 461 million/CNY 2.9 billion), or CNY 20 per share (representing a 25% premium to the stock’s recent trading range). This transaction occurs well after Carlsberg’s 2010 purchase of a 12.2% stake in CBC for CNY 40 per share.

Upon completion, Carlsberg will own 60% of CBC, the sixth-largest brewer in China. Management expects the deal to close in early 2014 and anticipates that it will be earnings per share accretive in the first year. The purchase price values the firm at an EV/EBITDA of around 15.7 times for the first full year of ownership. By gaining control of CBC, Carlsberg can work to strengthen CBC’s position in the Chinese beer market and make the brewer’s operations more efficient.

Additionally, we hope that under Carlsberg’s control CBC will stay focused on beer and no longer dabble in things such as hepatitis B vaccines. For now, we expect the deal to have minimal impact on Carlsberg’s earnings and are maintaining our DKK 545 fair value estimate on the company’s Danish shares and our USD 20 fair value estimate on the firm’s U.S. listed ADRs ( CABGY ).

China’s beer market is large, growing, and risky. Per capita consumption levels remain well below most of the developed world, providing the runway for meaningful volume growth over the next decade. However, fragmentation among brewers remains high, and consumers frequently opt for low-priced brews; this results in razor-thin profit margins for most of China’s breweries.


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