Huiyuan Juice boss declares brand freedom
By Olivia Chung
Coca-Cola's US$2.3 billion bid to buy China's Huiyuan Juice, a market leader in
the country's pure-fruit market, will serve as an early test for China's
Anti-Monopoly Law, which came into effect just this August, a year after being
passed by the government.
Huiyuan chairman Zhu Xinli, who is set to receive HK$7.55 billion (US$967
million) from the sale based on his stake of about 40%, on Saturday said the
deal "was a business act according to market rules" and should be allowed to go
ahead. "Brand names should be free of country boundaries and the human race,"
he said.
The sale would would be a "win" for "the country, the enterprise,
the staff and the consumers", he told press at the company's Beijing
headquarters.
Last Wednesday, Hong Kong-listed Huiyuan and Coca-Cola jointly announced that
Atlantic Industries, a wholly owned subsidiary of the US giant, had made a
HK$19.65 billion takeover offer for the mainland juice firm. At HK$12.20 per
Huiyuan share, the offer represents almost three times HK$4.14 closing price of
Huiyuan the previous Friday before the shares were suspended.
Huiyuan shares tumbled fell 4.95% to HK$9.60 on Friday on concerns over the
Anti-Monopoly Law. The stock earlier soared 164% on a single trading day to
close at HK$10.94 Wednesday after the offer announcement.
The deal, which would boost overseas sales for the iconic US soft-drink company
to compensate for falling revenues at home, would be China's first significant
take-over case by a foreign company since the Anti-Monopoly Law was enacted,
Merrill Lynch analyst Christine Lee said. The purchase will also give new
insights into the Chinese government's policies on acquisitions of domestic
assets by overseas companies. If approved, it will be the largest takeover of a
mainland enterprise by an overseas company.
Beijing-based Huiyuan, had a 42.6% share of China's 100% pure juice market in
2007, when it posted 2.7 billion yuan in sales, according to its estimate in
March. That would give Coca-Cola a dominant position in the sector.
Past history offers little insight into the chances of the Coca-Cola bid
getting the go-ahead. US investment bank Goldman Sachs in 2006 was allowed to
buy part of Shenzhen-listed Henan Shuanghui Industry Group, the country's
leading meat-processing firm, as part of a wider deal. Against that, The
Carlyle Group, a US private equity company, has been refused permission to buy
a controlling stake in China's largest construction machinery manufacturer and
distributor, Xugong Group Construction Machinery Co Ltd.
"The Ministry of Commerce has been discouraging foreign acquisitions of
domestic consumer brands with more than 20% market share in their fields since
2005," Selina Sia, an analyst at JP Morgan, said in a research note. "It
appears to us that government consent for the proposed acquisition is a key
risk for the [Coca-Cola] offer to become unconditional."
Even so, the differences between juice-maker Huiyuan and Xugong may be more
telling.
"Huiyuan is not a state-owned enterprise, while Shuanghui and Xugong were,"
Kevin Yin, of BNP Paribas, said. "Juice is not defined as a 'strategic sector'
for China, while Xugong construction machinery business is perceived [as] more
important and Shuanghui pork business is related to agriculture."
Coca-Cola also has a very strong internal legal team, while Goldman Sachs and
ABN Amro are advising on the deal, Yin said. "Assuming they have conducted
in-depth due diligence, we think the risk is lowered thereafter," he wrote in
his research note on September 4.
Coca-Cola's spokeswoman in China said its acquisition of Huiyuan will not
breach the Anti-Monopoly Law as the companies' combined market share will be
modest.
"The total market share of a combined Coke-Huiyuan Juice in China would be low,
given the market is segmented, so the deal will not breach the new law," she
said, quoting a report this year by sector research specialist Canadean on soft
drink services.
Huiyuan and Coca-Cola together would have less than 20% of sales in the overall
juice market in China, she said, citing a report this year by sector research
specialist Canadean on soft drink services.
Huiyuan's 11.6% share of the overall juice market in China makes it the
fourth-largest player, after Coca-Cola with 21.6%, UPC (20.8%), and Tingyi
(13.3%), according to AC Nielsen. In the narrower pure-juice and nectars
market, Huiyuan had 46% and 39.8% share in terms of sale volume.
Owning Huiyuan would give Coca-Cola more than just strong sales of a popular
brand in a fast-growing market and the Chinese company's manufacturing
facilities. Along with the deal would come a distribution network and the
ability to secure raw material supplies on the mainland.
Huiyuan has 1,800 distributors and 200 sales office to help drive sales of more
than 200 juice products under its core brand. Coca-Cola will have a 100%-owned
distribution channel immediately upon completion of the deal.
The market for Huiyuan's products is also growing fast as mainland personal
incomes growth helps boost demand for relatively expensive juice and health
drinks.
Juice beverages currently account for less than 10% of the overall mainland
beverage market, while sales of fruit drinks rose 12.3% last year in terms of
revenue, AC Neilson said. Analysts estimate the market will grow at more than
10% annually for the next few years, based on the average 50% market share in
developed countries.
That is not enough to prevent France's Group Danone, Huiyuan's second-largest
shareholder, from taking the chance of Coca-Cola's offer to exit the business.
The French company is selling its 23% interest as part of the deal.
For its side, capturing growth will help Coca-Cola offset a slowdown in its
native North America. The company posted a 9% drop in second-quarter operating
income in North America on higher costs. Unit case volume in China increased
13% in the same period.
Coca-Cola will also be hoping that a public outcry over the proposed deal will
fade. According to an impromptu online poll conducted by the mainland's largest
online portal Sina.com soon after the Huiyuan takeover was announced on
Wednesday, 82.21% of 76,009 respondents opposed the takeover as they were
worried a national brand would be killed. Only 12.62% were in favor of the
Coca-Cola purchase.
Coca-Cola's long involvement in the China market, covering several decades, may
give it a bigger chance of success with the Huiyuan purchase than other foreign
companies have had with China beverage ventures such as wines and beers.
"Dynasty Wine, 27% owned by Remy Martin, has seen declining profit due to an
ineffective marketing strategy. Kingway Brewery, already 21% owned by Heineken,
has been making a loss since 2007 due to lower plant utilization after recent
aggressive expansion," Heather Hsu and Janet Lai, wrote in a note for CLSA
Asia-Pacific Markets.
Even so, the potential in the mainland continues to attract overseas interest.
"Anheuser-Busch and InBev both have made pricey acquisitions in China over the
past three years and we expect global names are still interested in finding the
next target given the highly fragmented beer industry structure in China," the
CLSA note read.
Prices of potential mainland targets may also prove attractive. "Overall,
Chinese F&B [food and beverage] stocks are currently trading at only a 6%
premium on '08 PE [price-to-earnings ratio] and an 11% discount on [forecast]
'09 PE and this has made the Chinese F&B sector very attractive ... as most
still offer much stronger growth compared to the players in other developed
markets," the CSLA analysts wrote.
JP Morgan's Selina Sia said: "Foreign operators are challenged by two basic
issues in China: (1) domestic sourcing of raw materials; and (2) effective
product distribution channels. All foreign acquisitions aim to find solutions
to these two issues. Therefore, there are not many consumer companies that are
likely to attract foreign takeover, including [China's leading milk and dairy
products maker] Mengniu Dairy, which does not possess either raw material
support or product distribution network."
Olivia Chung is a senior Asia Times Online reporter.
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