Beer Makers Can't Play Nice

Playtime is over for Chinese beer maker Harbin Brewery Group and its two largest shareholders, Anheuser-Busch (NYSE:BUD) and Altria Group's (NYSE:MO) partly owned SABMiller. A couple days of speculation over how the two beer giants might work together as owners of the Chinese brewer ended when SABMiller decided not to play nice, instead launching a $553 million takeover offer for the brewer, the first of its kind for a Hong Kong-listed Chinese company.

The unsolicited bid, prompted by a breakdown in the two companies' strategic alliance, was rejected by Harbin's management over concerns about SABMiller's other Chinese beer interests. It's no secret SABMiller's goal is to merge portions of Harbin with another holding, China Resources Breweries, to control just over 14% of the Chinese beer market, trumping Anheuser-Busch's 12.9% share through Tsingtao Brewery Company.

SABMiller's takeover bid has ignited the first -- but certainly not the last -- major bidding war for a publicly traded Chinese firm. It's fully expected that Anheuser-Busch will make a counteroffer, hence the reason Harbin's stock rocketed well past the price offered by SABMiller on Wednesday, to finish at HK$4.70 (about $0.60).

In what could be termed karmic retribution, SABMiller's HK$4.30-per-share bid (about $0.55) represents a 32% premium over the price it could have paid for the government's share of Harbin in March, when it felt it was too expensive. Harbin's rejection now opens the door to a counteroffer by Anheuser-Busch, whose 29% stake was purchased just last weekend from the Hong Kong investors who bought the government share SABMiller rejected. (Got all that?)

The question, of course, is whether Anheuser-Busch will play ball. There's certainly not enough cash on hand to make a deal, so if it wants to do something quickly, it's either borrow or sell stock. As Seth Jayson recently pointed out, Anheuser-Busch's balance sheet isn't the cleanest, and more debt may not go over well with investors. Still, the company generates strong free cash flow, so it's conceivable a good second quarter will pay for most of the deal.

Harbin has set the table for an Anheuser-Busch takeover that, when added to the U.S. brewer's 10% stake in Tsingtao, gives the company ownership of just over 17% of the fast-growing Chinese beer market. In this highly fragmented market, the deal could give Anheuser-Busch a permanent lead in the battle for Chinese beer, which SABMiller simply can't afford.

Share your thoughts on the Fool's Altria Group discussion board .

Fool contributor Chris Mallon wonders what Chinese beer tastes like, and owns shares of Anheuser-Busch and Altria through his private investment partnership.