Talking Point

Coke deal gone wrong

Why the Ministry of Commerce has blocked Coca-Cola’s bid for Huiyuan

Going local: Coca-Cola hoped Huiyuan would boost its China presence

Zhu Xinli, founder of China Huiyuan Juice Group, has argued that there is little place for sentiment when it comes to selling companies. In his view, they should be “raised as a son but sold like a pig.”

It turns out that the Chinese government doesn’t agree with him. Son or pig, Huiyuan won’t be sold at all.

At least, not to a foreign buyer. On Wednesday this week, the Ministry of Commerce blocked Coca-Cola’s $2.3 billion offer for the juice maker, citing an “unfavourable impact on competition” in which consumers could be “forced to accept higher prices and fewer choice of products.”

What is the background to the rebuff?

This has always been a high-profile deal. Zhu has courted national publicity as a judge on Win in China (a reality show modelled on NBC’s The Apprentice) and has a reputation as a colourful entrepreneur.

Coke’s bid also represented a major foray into the non-carbonated segment of China’s soft drink industry, in which fruit and vegetable juice sales have grown rapidly (topping $10.5 billion in 2007).

Coca-Cola has trailed Pepsi internationally in tracking a consumer shift away from sugary pop towards apparently healthier waters and juices. So a leadership stake in the Chinese market was supposed to narrow the gap.

This all added up to the largest takeover attempt of a Chinese firm by a foreign company to date. It was also the first heavyweight offering to go up against China’s new anti-monopoly legislation, which was modified in August last year.

So why was it turned down?

On paper, the anti-monopoly law comes into effect when a company enjoys more than a 50% market share within an industry.

The challenge in the Coke-Huiyuan case is to define what market is being talked about. Yes, the new entity would have close to half of pure juice sales (drinks with at least 10% ‘real’ juice) but it is far less prominent in terms of total juice sales and even more so within the soft drinks market as a whole.

In fact, the Ministry of Commerce seems to be invoking clauses that block takeovers that could lead to restricted competition in the future. The concern seems to be that a combined entity would “bundle” its product offering together and force retailers into all-or-nothing decisions when stocking their shelves with beverages.

So, a victory for consumers?

The suspicion is that the Huiyuan decision is less focused on upholding consumer interests and more on protecting Chinese ones.

There was resistance to the proposed transaction from the start, with many shocked that Zhu was even considering a sale. After all, this is a man who had talked a good patriotic game, promising to build a national beverage champion that would “learn from Coca-Cola and Pepsi, and then surpass them.”

Coke did its best to get the deal through. Last year’s offer of at least $2.3 billion looked generous, at three times Huiyuan’s then market value and 50 times forward earnings. The bid was timed well too, in the afterglow of the company’s $400 million marketing investment in the Beijing Olympics, as well as its unwavering support through the difficult days of the international torch relay.

Then again, this week’s decision was not wholly unexpected…

China is already prone to bouts of economic nationalism, with local interests happy to wave the red flag (in two distinct metaphorical senses) when their own concerns collide with those of foreign players.

But this is hardly unique. Danone, the French water, dairy and baby food producer (and ironically another major shareholder in Huiyuan), received direct political backing from its own government to see off an approach from Pepsi in 2005. In the same year, US political opposition derailed CNOOC’s bid for Californian energy firm Unocal.

More topically, Australia’s Foreign and Investment Review Board is currently under pressure to block Chinese metal group Chinalco’s purchase of a minority stake in Rio Tinto.

Canberra senator Nick Xenophon, sharing Zhu’s taste for farmyard metaphors, insists that Australia should be “selling the milk and not the cow”.

But aren’t the best brands supposed to be international ones?

Of course, some would argue that the Commerce Ministry’s decision on Huiyuan has made things a lot easier for the Australian review board. And according to Zhu “brand names should be free of country boundaries”, although he did have a $900 million personal financial interest in thinking so.

Most multinational chief executives talk up their company’s culture or its customer focus or spirit of innovation – and rarely its national identity. But they are also usually arguing for market access from a position of strength. China remains sensitive to the weaker showing of its companies’ brands in global league tables. Like Japan and South Korea, it wants to create global household names.

But were Chinese fears overstated in the Huiyuan case?

Opinion is mixed. Long Yongtu, China’s lead negotiator on entry into the WTO, says it’s the corporate equivalent of a foreigner marrying a Chinese woman, and everyone needs to calm down. He thinks Huiyuan is also more likely to make international sales under a Coke umbrella. And, with a nod to local sensitivities, Coke has invested in local joint ventures to work on “China flavour” brands for international consumption.

As ever, the internet provides a good sounding board for Chinese opinion. In a poll of 550,000 netizens carried out by Sina, 79% supported the government’s decision to block the sale; with 5% undecided and the rest for the deal. Not surprisingly, lots of comments could be found on the net. Fairly representative is this one: “Coke’s bid for Huiyuan is the invasion of American capitalism! We are not going to allow this to happen. Those who support the deal are traitors to their country!”

More thoughtful critics refer to previous cases in which international firms have bought Chinese firms and dropped the local brands. However, in this case Coke wanted the Huiyuan brand. In fact, this was a sticking point in negotiations with the antitrust body, which said it would approve the deal but only if Coke gave up the brand. But brand issues aside, another thing Coke craved was access to Huiyuan’s upstream businesses in raw materials and packaging. In any future industry consolidation these would have great strategic value.

So a significant blow for Coke?

In 1931, in another M&A decision framed by tough economic times, Coke passed up on the chance to buy Pepsi. It now needs to rethink its China strategy and will hope that it has not missed out on another game-changing moment.


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