China Huiyuan Juice Group Ltd dropped the most in seven months in Hong Kong trading on concern regulators may block Coca-Cola Co’s $2.3 billion acquisition bid, which would be the largest foreign takeover of a Chinese company.
Huiyuan fell 7.7 per cent to close at HK$10.10 in Hong Kong, below Coca-Cola’s offer price of HK$12.20. The stock surged 164 per cent yesterday after the two companies announced the deal.
Coca-Cola’s bid for Huiyuan, China’s biggest maker of fruit juice by market share, could test an anti-monopoly law that took effect on Aug 1. The deal would be the biggest overseas acquisition by the world’s largest soft-drink maker as it tries to boost its share of non-carbonated drink sales.
“We do not see significant reasons why the authorities would approve this deal, allowing a major acquisition by a foreign firm of a highly visible domestic company in a visible industry,” Donald Straszheim, vice-chairman of Roth Capital Partners, a US investment bank specialising in emerging markets, said in a note yesterday.
The purchase would double Coca-Cola’s share of China’s fruit-juice market, which Euromonitor International Plc estimates is growing more than twice as fast as carbonated drinks.
Coca-Cola’s acquisition of Huiyuan, which is subject to Chinese regulatory approval, would be the biggest foreign takeover of a company in the Asian country, according to data compiled by Bloomberg.
‘Famous Brands’:The deal may violate China’s anti-monopoly rules, Straszheim said. He cited a regulation that protects “famous brands” from foreign acquisition.
Also Read
Kenth Kaerhoeg, spokesman for Coca-Cola Asia, refused to comment in a phone interview today.
China’s regulators will probably approve the takeover because the country benefits from US investment, said Pauline Loong, China political analyst at CIMB-GK Securities (HK) Ltd.
Still, more than 80 per cent of 76,000 participants in an online poll by Sina.com voted against Coca-Cola’s purchase of Huiyuan, the official Xinhua News Agency reported today.
Huiyuan was among the top 25 domestic brands last year, according to the China Brand Union Association, Xinhua said.
Regulatory Requirements
Chinese law requires that regulators be notified of deals increasing business “concentration” that meet “certain criteria.” Companies with “dominant” market share in any product and who “abuse” their position can be investigated under the legislation.
“The legislation, with its broad language and concepts, leaves large pockets of uncertainty,” Loong wrote in a note to clients. “The implementing regulations are also vague.”
Chinese rules issued separately require the government be notified of all deals involving companies with combined worldwide sales of more than 10 billion yuan ($1.46 billion) or combined China sales of more than 2 billion yuan in the previous financial year. Regulators also need to be informed when the China sales of each of at least two companies involved in a deal exceed 400 million yuan in the previous financial year.
Getting approval for the deal shouldn’t be a “major problem,” said Shaun Rein, managing director of China Market Research Group in Shanghai. The transaction involves beverages “which don’t threaten national security in China.”
Xugong Group
Carlyle Group, the world’s second-biggest private-equity firm, in July was forced to drop its plan to invest in China’s Xugong Group Construction Machinery Co after failing to gain approval from the government for the transaction even after changing its bid three times and cutting the size of the stake.
Huiyuan is the biggest fruit and vegetable juice company in China by market share with 10.3 per cent, followed by Coca-Cola with 9.7 per cent, according to Euromonitor. The Beijing-based company had 42.6 per cent of the market for 100 per cent juices last year, Huiyuan said March 31, citing AC Nielsen.
Chinese fruit and vegetable juice sales will probably increase 16 per cent to $12.3 billion this year, according to Euromonitor International. That’s more than double the growth of carbonated drinks, forecast to rise 7 per cent to $7.94 billion.
Zhu Xinli, Huiyuan’s founder and president, has agreed to sell his 42 per cent stake and will become honourary chairman after the takeover. Group Danone SA, the second-largest shareholder with 23 per cent, also agreed to sell.
Coca-Cola’s offer price beats Huiyuan’s highest closing price of HK$12.10 in July 2007.