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Aug. 3, 2018, 4:58 a.m. EDT

Heineken seals multibillion-dollar China deal

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By Saabira Chaudhuri

Heineken NV on Friday announced a tie-up with China's biggest brewer as it looks to tap drinkers in the world's largest beer market by volume.

The deal with government-controlled China Resources Beer Holdings Co. is set to give the Dutch brewer access to a sprawling distribution network in a competitive market where it has until now had a minimal presence.

Under the agreement, Heineken will take a 20.67% stake in China Resources Beer Holdings Co., currently owned by China Resources Enterprise, for $3.1 billion, while selling its China business to the brewer for about $305 million. The Chinese company will license the Heineken brand domestically and acquire a 0.9% stake in the European brewer for about $538 million.

"China is a continent and we are a small organization and to scale up for us is just unaffordable," said Heineken Chief Executive Jean-François van Boxmeer on a call with reporters.

Brewers have struggled to boost profits in China, a high-volume but intensely competitive market. Heineken on Friday said its profits in China are "negligible."

Per capita consumption of beer in the country declined 13% between 2013 and 2017, according to research group IWSR, as Chinese consumers turn to craft beer, wine and baijiu, a local spirit.

Beer executives say drinkers in the world's most populous country are opting for pricier beers over mainstream local brews.

"CRE lacks a premium brand for growth and we lack the distribution reach in China that CRE has," said Mr. van Boxmeer.

China Resources' main brand is an affordable beer called Snow, the largest beer brand in the world by volume, selling for an estimated 50% to 100% less than Heineken in China. The company dominates 26% of the Chinese market by volume, according to equity broker Redburn.

It reaches roughly 5 million restaurants and other outlets in the country, said Mr. Van Boxmeer.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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