Beijing Yanjing Brewery Co Ltd has dropped out of the race to buy brewery assets being sold by China Kingway Brewery Holdings after failing to reach an agreement on the price, a source said, dealing a serious blow to what would have been a $700 million deal.

Beijing Yanjing, China's fourth-largest domestic brewer, was in advanced talks to strike a deal with Kingway after beating the world's biggest brewer, Anheuser-Busch InBev NV, in the final round of bidding, sources previously told Reuters.

"Yanjing was not able to get there on price at the end," the source, who had direct knowledge of the matter, told Reuters.

With Yanjing out, the source said that the process could be re-launched, though no formal communication of that has occurred yet.

Shares in Kingway, which has a market value of $558 million, extended their fall to trade down 6.7 percent, far outpacing a 0.6 percent fall in the benchmark Hong Kong share index. Beijing Yanjing shares were up 0.7 percent.

A failed Kingway deal would make it the second major M&A process to be pulled in Asia this month. Last week, Brambles Ltd, the world's biggest pallet supplier, scrapped a $2 billion deal to sell its Recall information management business because of low offers.

The source declined to be identified as the discussions were confidential. Kingway and AB InBev declined comment. Efforts to reach Beijing Yanjing for comment were not successful.

Cost pressures

Kingway said in January that it plans to sell some of its brewing business in southern China as its profits were pressured by fierce competition and rising costs among other reasons. The company's gross profit margins fell to 17.9 percent last year from 21.8 percent in 2010, while beer sale rose 1 percent, it said in March.

The auction had also attracted interest from China Resources Snow Brewery Co and Tsingtao Brewery Co Ltd among others. Talks with those suitors were broken off several weeks ago, sources previously told Reuters.

Kingway has said previously that it does not plan to sell an equity stake in the company. It had asked suitors to submit bids for equity stakes in six breweries, all beer and beer-related trade marks, domestic and overseas distribution networks, the sources had said. The company had planned to retain two of its production facilities.

An eventual winner would benefit from strong growth in China's beer consumption, with beer demand seen at 450 million hectoliters in 2010, nearly twice that of the United States, according to data compiler Euromonitor.

China's beer demand is expected to grow 5 percent per year in coming years, double the 2.5 percent growth forecast for the global market for 2011.

The euro zone debt crisis, slowing China economy and the resulting market turmoil are making suitors wary of big M&A bets. Some buyers are also finding it challenging to finance their purchases due to falling share prices.