The Chinese government yesterday used its anti-monopoly law to put a stop to the Coca Cola Company's proposed purchase of Huiyuan Juice. The Ministry of Commerce (Mofcom) said that the acquisition could cause problems for smaller companies in the drinks sector and lumber consumers with higher prices and limited choice.
If the $2.4 billion deal had been approved, it would have been the largest ever China-inbound M&A transaction.
"We are disappointed, but we respect (Mofcom's) decision," said Muhtar Kent, Coke's president and CEO, in a statement.
Matthew Crabbe, managing director of market intelligence firm Access Asia, says Coke "will be frustrated that they have failed to shore up a large percentage share of the fastest growing segment of China's drinks market", namely juice.
China is Coke's third largest market, but it is one where fruit juices are more popular than carbonated drinks. Huiyuan has a market share of around 40% in both 100% juices and nectars, which would have been a fine addition to Minute Maid Pulpy, Coke's fruit juice brand that has a relatively small portion of the market.
In some respects, the regulator's decision could come as something of a relief for Coke. The US company's offer, at a 195% premium to the target's share price, seemed aggressive when the deal was announced in early September. Six months later, after the market has declined, it looks like an extremely expensive decision. Coke could do worse than keep a couple of billion dollars of cash in the bank.
However, there is much to suggest that Coke was sold on the deal right to the end. Less than two weeks ago the beverages firm announced that it was going to invest $2 billion into China over the next three years, which is more than the $1.6 billion it has invested in the country over the past three decades. As the March 23 deadline for the completion of the deal was creeping closer, Coke might have been trying to signal its commitment to China's regulators.
For Huiyuan, the outcome is unfavourable. At the close of trading yesterday, the company's share price was down 19.4% at HK$8.30, which is 31% lower than the offer price of HK$12.20.
The main investors will be disappointed as they were set to be bought out at a price that is no longer available in the market. With his 36% stake, the company's founder, Zhu Xinli, stood to gain the most -- he would have pocketed approximately $850 million. French food company Danone, with a 22% stake, and private equity firm Warburg Pincus, with 6.8%, are the two main investors who would have hoped to profitably cash out of their investments.
Apart from its size, the deal was significant since it was seen as a test case for China's anti-monopoly law, and yesterday's decision could signal how the law is going to be used in the future.
Some have claimed that the government's decision not to grant approval was in some way politically motivated. Evidence for this is that the banks advising on the deal -- Royal Bank of Scotland for Coke and Goldman Sachs for Huiyuan -- would not have recommended the clients go ahead with the deal if they thought there was any economic reason for the deal not to be approved. Either that, or it shows a failure to accurately gauge the mood of the Chinese government.
Goldman Sachs had no comment, while RBS did not respond to requests for comment.
"You put together one of China's most successful juice companies and the world's largest beverage company, and it is not surprising that Beijing concluded it is a monopoly," says Robin Gerofsky Kaptzan, a Shanghai-based legal expert. "Although the decision is dealing with issues specific to large [multinationals], any message being sent for M&A generally is that all companies, regardless of size, should beware," she adds.
"It is encouraging to see that the case was handled by the Chinese government in a very professional way," says Jerry Kong, partner at Grandall Legal Group (Shanghai). He points out that the decision came on time, before the deadline for the deal's contract, and that it was done transparently, with the decision published on Mofcom's website.
"People may have different opinions on the decision or the reasons behind the decision," says Kong, "but at least the government is strictly following the procedure under the anti-monopoly law...it is not a guessing game anymore."
China watchers also point to an earlier decision made by the Chinese government relating to InBev's recent $52 billion takeover of Anheuser-Busch. After the deal, InBev, now the world's largest brewer, was told by the Chinese regulator that it would not be able to increase its 27% stake in Tsingtao Brewery and its 28.5% in Zhujiang Beer.
The wild card in the pack is how China's refusal to play ball with the world's leading beverage company will be perceived in countries where Chinese companies are pursuing deals. This week, Aluminum Corporation of China's proposed $19.5 billion investment in Australian miner Rio Tinto went into a second stage of scrutiny. China may find its own actions mirrored in markets where it is seeking to invest.