HONG KONG (Reuters) - China Resources Beer (Holdings) Co Ltd is in talks to acquire Heineken NV’s China business in a deal that could be worth more than $1 billion, as the country’s largest brewer seeks new growth from premium brands, five people close to the discussions said.

FILE PHOTO: A Heineken sign is seen at the main access to the new Heineken brewery in Meoqui, in Chihuahua state, Mexico February 27, 2018. REUTERS/Jose Luis Gonzalez

The negotiations come as global beer giants such as Heineken, AB InBev and Carlsberg are facing fierce competition from local rivals and each other in emerging markets, which have been touted as the growth engine for the world’s biggest brewers.

China is the world’s largest beer market by volume. CR Beer’s biggest brand, Snow, is the world’s top-selling beer, but is almost exclusively sold in China.

One of the sources said the deal between CR Beer and Heineken would most likely include three breweries - in Guangdong, Hainan and Zhejiang provinces - Heineken’s distribution operation and its brands in China.

The two brewers have discussed a share-swap as part of the transaction, the source said.

Details have not been finalised and talks could yet fall apart, the sources said. They declined to be identified as the information is not public.

CR Beer did not respond to requests for comment. Heineken declined to comment.

Shares of CR Beer jumped as much as 14.4 percent on Friday in Hong Kong to an all-time high of HK$35.30, following the Reuters report published after Thursday’s market close.

Graphic: tmsnrt.rs/2xMlHgE

The company said in a stock exchange filing late Friday that it regularly explores possible transactions. The statement said CR Beer is not aware of any specific reason for the increases in price and trading volume of its shares, or any inside information that needs to be disclosed.

“The (CR Beer) stock move is driven by the news about the company’s interest in Heineken’s China business. China Resources already owns the top beer brand in China, but it’s a very local brand,” said Steven Leung, a Hong Kong-based director at brokerage UOB Kay Hian.

“With the acquisition of the Heineken business, the image of the company as a whole will improve, as China is upgrading its consumption quality,” he said. “The sustainability of the rally in the stock will depend on what price they pay for the Heineken business.”

Shares in Amsterdam-listed Heineken rose 3 percent on Thursday.

Heineken, which entered China in 1983, has struggled to set up a strong distribution network and to make a mark with its flagship Heineken lager, which lags far behind AB InBev’s Budweiser in the premium market, industry analysts say.

The Dutch brewer had a 0.5 percent share of the China market by volume in 2016, according to research firm Euromonitor International, while CR Beer accounted for more than a quarter.

Heineken sells its premium lagers Heineken, Tiger and Sol in China, along with cheaper local brands Anchor and Hainan Beer.

The company has invested millions of dollars in promoting Heineken as the global lager of choice, predominantly through sports, including soccer and Formula One. Next month will mark its second time as prime sponsor of the Chinese Grand Prix.

Beer sales volume in China has been declining since 2013 and is forecast to continue to fall, according to Euromonitor. Sales of higher-margin premium beers, however, have been growing at a double-digit rate each year during the same period.

“CR Beer doesn’t have super-premium lagers, while Heineken has high-end brands but lacks scale in China,” said one source. “Heineken is a natural target for CR Beer.”

Heineken’s eponymous brand sells for three times the price of Snow in China. Chinese beer drinkers are overwhelmingly consumers of low-margin inexpensive beer, which makes up 80 percent of the market by volume, compared with an average of 18 percent in big developed markets, according to Nomura analysts.

Last year Japan’s Asahi Group Holdings sold its 19.9 percent stake in Tsingtao Brewery Co - CR Beer’s biggest domestic rival - for $937 million as it decided to focus on Europe and elsewhere in Asia.

CR Beer’s interest in Heineken’s China unit follows its takeover in 2016 of SABMiller’s 49 percent stake in its CR Snow venture for $1.6 billion.

That acquisition helped the Chinese brewer turn around its business. In 2016 it reported its first annual profit in three years after a renewed focus on the Snow brand and expanded sales in key Chinese cities.

Heineken trades on an enterprise value - market capitalization plus debt - of 12 times its earnings before interest, tax, depreciation and amortization in the last year. That is above Carlsberg’s multiple of 10 but far short of CR Beer’s 23.