Chinese Shut Down Coke's Bid for Huiyuan

Acquisition Was Test Case for Anti-Monopoly Law and China's Willingness to Let Foreigners Buy Local Assets

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Coke's President-CEO Muhtar Kent spoke in Shanghai on March 6, 2009
Coke's President-CEO Muhtar Kent spoke in Shanghai on March 6, 2009
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SHANGHAI (AdAgeChina.com) -- China's leaders are eager to see local companies invest in overseas assets, grow their businesses and improve the overall image of China. But the government isn't ready to loosen control over its own assets.

On March 18, China's Ministry of Commerce (MOC) issued a long awaited decision and nixed Coca-Cola Co.'s bid to buy about two-thirds of China Huiyuan Juice Group for $2.4 billion. The Hong Kong-listed company is the mainland's largest producer of pure fruit juices.

The acquisition would have dramatically expanded Coke's share of the non-carbonated drinks business in China, already Coke's third-largest market.

Rivals lobbied against the deal, complaining that it would give the combined business too great an advantage, making it a closely-watched test case for an anti-monopoly law passed last year. China's government agreed, and killed the acquisition on the grounds that competition in the local market could be hurt

The acquisition would have been the largest foreign takeover of a Chinese company. The deal was widely seen as a test of China's willingness to let local firms fall under foreign control. China has been loathe to do that in the past and clearly hasn't changed its mind, based on today's ruling.

"We are disappointed, but we also respect the MOC's decision," said Muhtar Kent, Coke's Atlanta-based president-CEO in a company statement.

"We put a tremendous effort into providing all the relevant materials to the Ministry of Commerce to ensure that they had all the information available and understood the transaction."

Credit Suisse analyst Carlos Laboy called the Chinese government's move "significant," noting Coca-Cola's good corporate citizen status, which was on display as a sponsor of the Olympic Games in Beijing last year. "Coca-Cola's aspirations of juice-market dominance in China are clearly dampened," he wrote in a research note. "This ruling gives a stronger indication that concentration of market share will be tightly controlled in the future."
Huiyuan is the largest marketer of pure fruit juice in China
Huiyuan is the largest marketer of pure fruit juice in China
Mr. Laboy said the scuttled deal would not impact his firm's earnings outlook for Coca-Cola, which was upgraded to outperform on March 9. "Investors who felt that Coca-Cola was paying too much for the Huiyuan assets will likely feel satisfied with this outcome," he said. And, he added, "PepsiCo may be encouraged by the fact that they will not have to face a looming market-share gap in the China juice segment."

"While we think the decision is disappointing, from a strategic perspective we do not think it will slow Coca-Cola's aggressive efforts to expand in China, one of the largest and potentially most lucrative markets in the world," said Philip Gorham, an analyst with Morningstar. "We think today's ruling shows that Coke will have to build from the ground up in China, and that acquiring market share may be more difficult than the firm had initially thought."

Coca-Cola will now do just that, focusing on growing its existing products and creating new brands for China, including the juice segment.

Earlier this month, the company opened a $90 million innovation and technology center in Shanghai, its largest R&D facility in Asia, partly to speed up development of new products to suit Chinese consumers' tastes and preferences.

The center "will play a key role in bringing this innovation to life," Mr. Kent said.

Coke also plans to spend $2 billion on new plant and distribution infrastructure, sales and marketing, and R&D in China over the next three years, underscoring China's importance as a major growth market.

The company apparently hoped that announcing those plans on March 6 would send a message to the government about Coke's commitment to China and help get the Huiyuan deal approved.


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