Juicy returns?

Will Guangzhou Pharmaceutical bid for Zhu Xinli’s firm?

Zhu Xinli founded Huiyuan Juice in 1992. He says he got the inspiration after seeing a newspaper photo of a bitter-faced peasant biting into an apple. Behind him there was a cart full of rotten fruit. The caption read: “I can’t sell them, so I eat them.”

Determined to give local fruit growers a more reliable outlet to dispose of their crops, Zhu acquired a Shandong canned fruit factory and subsequently grew it into China’s biggest fresh juice maker.

The Shandong native may sound sentimental about how he started his firm, but he’s a lot less sentimental when it comes to selling it. Famously, Zhu argued that businesses should be “raised as a son but sold like a pig”. He made the remark shortly before the Ministry of Commerce vetoed Coca-Cola’s $2.3 billion buyout offer for Huiyuan in 2009. Zhu would have received $1 billion for his 42% stake, but the lucrative exit was blocked by regulators. The landmark case was nixed by a mix of nationalism and the country’s new antitrust laws (see WiC7).

With a sow’s ear made of Zhu’s M&A bonanza, the 61 year-old vowed that if couldn’t sell Huiyuan, he’d make it vastly bigger.

In the wake of the failed deal, capital expenditure surged to Rmb772 million ($124 million) in 2009 from a budgeted Rmb200 million. Employee numbers also tripled to 17,111 from a year before, with more than half of the new staff demobilised soldiers hired to man Huiyuan’s expanded distribution network. Their military training, Zhu suggested, would help him to meet strict sales targets.

Others took the view that Zhu was bulking up to sell a ‘fatter pig’, with Gao Bo, a market expert, telling the National Business Daily last month that Zhu is still planning “a more extravagant marriage.”

Takeover speculation was in the air once more late last month after the company’s thinly-traded shares in Hong Kong suddenly surged more than 35% in a week. Huiyuan then indicated in a regulatory filing that it was in acquisition talks. Reports on Zhu’s potential exit swiftly followed, with the Hong Kong Economic Journal suggesting that Zhu is hoping to sell to Guangzhou Pharmaceutical. The state-controlled firm has just won a court verdict over the labelling rights to Wanglaoji – China’s best selling canned beverage – in a long-running battle with Jia Duo Bao Group (see WiC103). It may now see further synergies in selling both herbal tea and fresh juice. But 21CN Business Herald has also reported that Zhu is talking to Jia Duo Bao. “Every man on the street knows Zhu is always eager to sell,” the newspaper said.

Huiyuan’s strength in the juice market has faced dilution from rivals in recent years, including Coca-Cola. It still accounts for more than half of fresh juice sales (i.e. not from concentrate). But a Rmb5 billion punt into the low-concentrate juice market hasn’t paid off. According to AC Nielsen, Huiyuan’s share in the segment fell to 4.8% in 2011 from 7% in 2009.

Last week, Huiyuan reported a 95% plunge in 2012 net profit to just Rmb16 million. Worse still, it now has Rmb3 billion in bank borrowings, compared with Rmb403 million of debt when Zhu attempted to flog the firm to Coke.

Zhu’s 42% stake in Huiyuan is worth $250 million at current market value, which probably factors in a takeover premium. Investors suspect he would like to redirect the sale proceeds into upstream assets including fruit-growing businesses that he still owns personally. But if he can’t sell Huiyuan this time, commentators might wonder if conditions will ever be as ripe as when Coke came calling.

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