China Resources Enterprise sells retail unit to focus on beer

Shares in China Resources Enterprise leapt more than 50 per cent after the state-owned supermarkets and beer group produced another twist in China's SoE reforms with an offer from its parent to buy back its loss-making non-beer businesses for $3.6bn.

The figure represents a pre-tax loss to CRE of $877m, but investor relief sent the company's underperforming shares up more than 60 per cent in early trading in Hong Kong. By mid-morning the stock was up 54 per cent at HK$23.45.

The deal will leave CRE focused on brewing - it owns the top-selling mainland Snow Beer brand - while its parent, China Resources Holdings, concentrates on turning round its ailing supermarkets.

These include a joint venture with Tesco, after the UK retailer injected its loss-making business into the Chinese group in 2013 in return for a 20 per cent stake.

Yan Qiang, retail analyst at Beijing-based Adfaith Consulting, described the deal as a smart move, since the parent group was better placed to fund the turnround of the supermarkets.

"China Resources may also be preparing for a possible merge with other big SoEs in the sector as the government is now calling for a further industrial integration," he added.

China began in earnest last year to better realise the value trapped in its sprawling state-owned enterprises.

The China Resources deal is the biggest buyback to date. Previous deals have included injecting assets into listed companies, as Citic Group did in a $37bn move last year, and spin-offs such as the $17.4bn sale of a stake in the retail arm of Sinopec, the oil group.

As part of Tuesday's deal CRH also offered to buy up to 10 per cent of CRE's shares. To an investor who successfully tendered stock, the whole transaction, including a special dividend from the proceeds of the main sale, would represent a 59.2 per cent premium to the share price before the offer.

The offer, which requires approval by independent shareholders since CRH owns almost 52 per cent of CRE, would be paid half in cash and half in promissory notes.

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