NEW YORK (The Deal) -- Beer, retailing, food and beverages.
There are stranger combinations, but this one hadn't been working for Snow Beer brewer China Resources Enterprise, whose share price had limped along as investors fretted about what it would take to turn around the performance of its ailing supermarkets.
That was until 52% shareholder China Resources (Holdings) on April 21 agreed to buy back its non-brewing assets for HK$28 billion ($3.6 billion) and to purchase up to 10% of its capital, sending China Resources Enterprise's shares up 57%.
The deal presented a new twist on the reforms planned for China's sprawling state-owned enterprises that are exercising investors and advisers and have helped push Chinese stock indices to seven-year highs. Privatizations via initial public offerings or share placements will play a part, but they will be among an array of tools that the state will use to improve its companies' performance.
"There were strategic steps that China Resources needed to take to turn those businesses around, including e-commerce investment, but it wasn't appropriate to do that within a listed company," a source said of the China Resources Enterprise deal. "Market reality was the driver of the deal but the themes -- unlocking value, making the structure simpler and more transparent -- tell a similar story to other SOE reforms."
China has been tweaking the structures of its state-owned enterprises for about 30 years, about halving their number to an estimated 155,000, from about 300,000 in 1994, according to KPMG LLP.
The last concerted round of reforms around the turn of the millennium didn't always end happily, with resultant minority stake IPOs in SOE subsidiaries often failing to improve companies' profitability and leaving newcomer investors frustrated at their lack of say. And the reforms haven't always made SOEs more fleet of foot.
"What has happened in some of the earlier [reform] rounds is the creation of fewer, much larger players. That has the benefit of giving them more market power but they have in some areas become a drag on the economy," said Edward Radcliffe, co-founder and partner at investment bank Vermilion Partners Ltd., which advises international companies on their China strategy.
"Stimulating creativity and dynamism is particularly important in the rebalancing of the economy toward consumption-led growth," which is a key part of China's current five-year plan, he said.
"Giant companies are not normally known for being innovative in any part of the world," Radcliffe said.