Heineken HEINY 1.22% 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 multibillion-dollar 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 , 0291 -0.99% 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. 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 also 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 the Heineken brand in China. The company dominates 26% of the Chinese market by volume, according to equity broker Redburn.
The deal comes about two years after Anheuser-Busch InBev NV agreed to sell SABMiller’s stake in its Chinese beer joint venture with China Resources. The Chinese company bought SAB’s 49% stake on the cheap as the Belgian brewer sought Chinese regulatory approval for its megadeal to buy SAB, then the world’s second-biggest brewer.
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Now, Heineken and China Resources will together aim to take on AB InBev’s Budweiser brand, which has made big inroads in the country.
Outside of China, Heineken is grappling with increased competition from AB InBev following the SABMiller deal in some of its biggest markets like Mexico and Nigeria. The Amsterdam-based brewer, now the world’s second biggest, has also struggled to woo American drinkers, who are increasingly turning away from mainstream brands toward craft beer, spirits and wine.
In China, in addition to its eponymous brand, Heineken also sells international brands Tiger and Sol, along with cheaper local brands Anchor and Hainan Beer. But the company on Friday said its profits in China are “negligible.”
The company plans to let China Resources decide whether to continue selling those domestic brands, said Mr. van Boxmeer.
“They have a formidable selling machine,” he said. “They are very motivated to make a big acceleration of the Heineken brand. It’s about mobilizing people on the ground to bring the beer in so many more cities and provinces and outlets in which today we are not.”
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com