Harbin Brewery, the target of a potential takeover battle between the world's two biggest brewers, said its partnership with SABMiller had failed, and that it favoured having Anheuser-Busch as its major shareholder.

"We had hoped the (SABMiller) tie-up would boost our brand, and improve technology and sales. But in the past 10 months, nothing has happened," Harbin Chief Executive Peter Lo said in a telephone interview yesterday.

He said Anheuser-Busch, which over the weekend said it was buying 29 per cent of Harbin for HK$1.08 billion, or HK$3.70 per share, was a better long-term partner.

SABMiller, the world's second-largest beer maker, this week launched a hostile US$553 million bid for Harbin after Anheuser-Busch revealed its investment.

SABMiller, offering HK$4.30 a share, challenged Harbin's recommendation that shareholders take no action on its bid.

"The Harbin management team need to explain why they think our offer undervalues their business," SABMiller spokesman Nigel Fairbrass said in Hong Kong yesterday.

SABMiller owns a 29.4 per cent stake in Harbin, China's number-four brewery, which it bought last year.

"We believe if you run a company in China, local management is important," Lo said. "Without the support of Harbin's management and staff, how can SABMiller run Harbin Brewery, even if it holds a majority stake?"

Lo declined to say whether Harbin expected a counter-offer from Anheuser-Busch.

St Louis-based Anheuser-Busch, brewer of Budweiser beer, declined to comment yesterday on its plans.

Lo said conflicts of interest had emerged over SABMiller's holdings in both Harbin and China Resources Breweries, which is 49 per cent-held by the firm.

Harbin and China Resources Breweries, the country's No 2 beermaker, dominate Northeast China, with a combined market share of 60-70 per cent.

"Early this year, we wanted to raise prices but they (China Resources Breweries) wanted to take advantage of us and cut prices," he said.

Harbin has said it terminated its strategic partnership with SABMiller, and Lo said Anheuser-Busch would make a better partner for Harbin.

"We quite welcome Anheuser-Busch to become our major shareholder. Anheuser-Busch has been quite successful in the past few years in China. They only have one plant, in Wuhan, but you can find Budweiser all over China. They are the only one building a nation-wide network," he said.

Anheuser-Busch holds a nearly 10 per cent share in China's biggest beer maker, Tsingtao Brewery, a stake it will boost to 27 per cent over the next few years.

Nonetheless, Tsingtao said yesterday it supported Anheuser-Busch's investment in its rival.

Not everyone expects a bidding war for Harbin.

"We would not bet on a higher offer from Anheuser-Busch, given the frothy price already on offer from SABMiller," said David Webb, a shareholder activist and board member of the Hong Kong stock exchange.

"Don't depend on the big boys fighting it out," he said on webb-site.com.

(HK Edition 05/07/2004 page3)