Coke moves a step closer to acquiring Huiyuan Juice

The approval process for the $2.4 billion acquisition enters phase two. External factors suggest the deal will be successful by the March 23 deadline.
The Coca-Cola Company's application for regulatory approval of its $2.4 billion acquisition of Hong Kong-listed Huiyuan Juice has crossed the initial 90-day milestone, and has now moved into the next phase of the 200-day period, the two companies said in a joint statement yesterday.

The application has been lodged with the Chinese Ministry of Commerce for approval under the anti-monopoly law.

The 200-day period to gain regulatory approval, which was agreed between the two parties, will end on March 23, 2009. The release only described the approval process as ôprogressingö.

The purchase of a strong domestic brand by one of the worldÆs most omnipresent multinationals has proved controversial. Zhu Xinli, the entrepreneur and 41%-stakeholder behind Huiyuan, has been under fire for selling out to a foreign company rather than continuing to nurture one of ChinaÆs successful home-grown brands. If successful, the acquisition will be the largest China inbound M&A transaction to date.

But CokeÆs offer is hard to refuse. From a multiples perspective, $2.4 billion translates to six times the targetÆs 2007 revenues and 26 times trailing profits. The offer price of HK$12.20 ($1.56) per share also represented a 195% premium to the last traded price before the deal was announced and is nearly double HuiyuanÆs high of HK$6.52 over the past six months.

On the day that the deal was announced, HuiyuanÆs share price soared by 164% to HK$10.94. It has fallen 12% since then, but this is still a small amount compared to the 34.8% drop in the Hang Seng Index in the same period. The fact that the share price has stayed near the offer price suggests shareholders believe the deal will secure all the necessary approvals.

Coke declared good third-quarter results last month achieving quarter-on-quarter earnings per share growth of 17% û its eighth consecutive quarter of double-digit EPS growth. In an earnings call posted on the firm highlighted that volume growth was driven by international markets. In China specifically, sparkling beverages grew by 13% and still beverages, led by CokeÆs juice brand Minute Maid Pulpy, increased by 27%.

Coke is paying aggressively to further diversify its China business into fruit juices, which are popular among Chinese consumers. Coke has said that the Huiyuan brands are complementary to its existing Minute Maid business.

The deal is widely perceived as one that will signal ChinaÆs intent with respect to inbound M&A as it is difficult to see a juice brand being termed a "strategic" asset. The latter has been the main reason why some other deals have not received regulatory approvals.

Further, Chinese companies are seeking to use the current market situation to acquire overseas brands. In September mid-sized Chinese construction machinery maker Changsha Zoomlion and a consortium of financial investors secured approvals to buy Italy's Compagnia Italiana Forme Acciaio (Cifa) for Ç271 million ($342 million). The deal is expected to give Zoomlion a foothold in foreign markets using Cifa's international brands and global sales and distribution network. The deal comes on the back of a number of acquisitions by Chinese state-owned enterprises in the resources sector this year.

It may be difficult for ChinaÆs regulators to turn down inbound proposals while seeking approvals for their own firms to venture out. The recent experience of companies merging, InBev and Anheuser-Busch, also suggests that the Coke deal could see the green light. The merger between the Belgian and US drinks companies was approved on the condition that the two companies, which already have a significant market share in China, refrain from buying stocks in four Chinese brewers. Regulators could stipulate conditions for the Coke deal too in order to allow it to proceed, say sources.

Royal Bank of Scotland is acting as financial advisor to Coca-Cola. Goldman Sachs is advising Huiyuan Juice, while UBS is advising Huiyuan's controlling shareholder, Huiyuan Holdings. BNP Paribas will provide a fairness opinion to the board of Huiyuan.
¬ Haymarket Media Limited. All rights reserved.
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