Coke aims to prove deal is the real thing

Published on February 16, 2009 by brooks | This story has been viewed 423 views

These are heady days for Coca-Cola in China, its fourth-largest market. The US company last week posted solid fourth-quarter results helped by a 29 per cent rise in case volumes in China, making it the company’s fastest-growing market globally.

Muhtar Kent, Coke chief executive, says that its flagship product had become an “affordable staple” for Chinese consumers.

However, convincing China’s policymakers to swallow its proposed takeover of the country’s leading juice maker is proving a harder task.

It is nearly six months since Coke announced a planned $2.4bn acquisition of Huiyuan Juice Group, a Hong Kong-listed company which boasts a 42 per cent share of the domestic market in 100 per cent juices.

The proposed takeover, which awaits regulatory approval, is the highest profile agreement to face scrutiny under China’s revamped anti-monopoly regime, which was given extra teeth last August.

What Beijing decides, and how it goes about deciding, is of intense interest to those assessing China’s willingness to accept foreign takeovers of leading domestic brands.

The Ministry of Commerce, which oversees the anti-monopoly laws, has not commented on the merger filing except for a recent oral acknowledgment that the deal had entered second-stage assessment.

This lack of clarity is starting to unnerve some connected with the deal, one of whom describes the process to date as “like sending a ball into a dark tunnel”.

People familiar with the filing say that the full spectrum of outcomes remained possible, from outright rejection to acceptance. “Mofcom could also approve the deal but attach conditions,” says one observer.

Last November, Mofcom waved through InBev’s $52bn acquisition of rival brewer Anheuser-Busch – both have operations in China – but imposed several restrictions on the combine acquiring further interests in four key domestic beer companies.

That ruling, the first published under the new monopoly regime, triggered fears that authorities could use the laws to shield domestic industry from foreign competition.

People familiar with the filing say Coke had spent the past few months answering questions from ministry officials.

“Mofcom has been using Coke as a guinea pig to find out how other jurisdictions handle comparable antitrust filings,” says one person. “This is a learning process for them.”

Some dealmakers believe Mofcom’s deliberations on the deal could anyway have been delayed by inter-agency rivalry in Beijing, or a lack of technical bureaucrats qualified to administer the new laws.

Authorities also have to be mindful of nationalist sentiment, as manifested on websites, which vehemently objects to a loss of a “cultural pillar”.

Some theorists believe Mofcom is waiting for the mood music between Beijing and Washington to improve before clearing the deal.

Whatever the reason, the tension is beginning to mount. The deal has a “longstop” date of 23 March, after which Coke has the right to renegotiate the terms.

That prospect will concern the selling consortium, which comprises Zhu Xinli, Huiyuan’s founder chairman, who owns 36 per cent of the company, France’s Danone (23 per cent) and Warburg Pincus, the US private equity firm, (6.8 per cent).

Coke’s offer is HK$12.20 a share in cash, almost treble that of Huiyuan’s last closing share price before the deal was announced and a price-earnings ratio of 50.

Market watchers believe that fears about the approvals process might account for the sudden fall in Huiyuan’s share price last week.

“The share price is now about 25 per cent below Coke’s cash offer and that could be sign that merger arbitrageurs are starting to doubt the deal will go through,” says one market observer.

However, an outright rejection would represent a big surprise, not least because Coke has built up credibility and respect among Beijing policymakers in recent years.

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