China Blocks Coke’s Bid for Huiyuan, Jeopardizing Resource Deals in Australia
By Jason Simpkins
Managing Editor
Money Morning
Chinese regulators rejected Coca-Cola Co.’s (KO) $2.3 billion bid for China Huiyuan Juice Group Ltd., China’s largest juice company. The move surprised many analysts, as it will make it easier for Western countries to prevent Chinese companies from acquiring overseas targets and discourage other large corporations from pursuing mergers in China.
China’s Ministry of Commerce blocked the deal saying the biggest takeover of a Chinese company failed to meet the country’s anti-monopoly law and would be “negative for competition.”
“If the acquisition of Huiyuan went into effect, Coca-Cola is very likely to take a dominating position in the domestic market and the consumers may have to accept the high price fixed by the company as they don’t have more choices,” the Ministry of Commerce said in a statement.
Huiyuan Juice is a household name in China, and controls 42% of the country’s pure-fruit-juice market. Coca-Cola controls 54% of China’s soda market.
Coke could challenge the ruling under Article 53 of China’s anti-monopoly law, but the company said in a statement that it would not pursue the deal any further.
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“We are disappointed, but we also respect the Ministry of Commerce’s decision,” said Coca-Cola Chief Executive Officer Muhtar Kent.
Coke launched a $2.4 billion bid for Huiyuan Juice last September. At HK$12.20 a share, the deal valued Huiyuan at a 195% premium to its market value prior to the offer. Indeed, the offer was so generous, that some investors thought Coke might actually be overpaying.
Huiyan stock was suspended 13 minutes after trading started on the Hong Kong exchange. The stock plunged a record 19% to HK$8.30 a share during that time.
Implication on China’s Overseas Acquisitions
Analysts were surprised that authorities blocked the deal, which had few economic implications and posed absolutely no threat to national security.
“This seems to me to be against China’s best interest,” Chris Ruffle, Emerging Markets Director at Martin Currie Investment Management Ltd. told Bloomberg. “It plays into the hands of protectionists who will not find it easier to block acquisitions which Chinese companies make overseas.”
Aluminum Corp. of China Ltd. (ADR: ACH), also known as Chinalco, is already facing resistance in Australia, where the company is trying to finalize a $19.5 billion tie-up with Rio Tinto PLC (ADR:RTP).
Australia’s Foreign Investment Review Board is considering the deal amid political opposition that doesn’t want to see key mining assets fall into foreign hands.
Under terms of the agreement, state-owned Chinalco would pay $12.3 billion for a piece of Rio’s iron ore, copper and aluminum mining assets, and $7.2 billion for convertible notes that would double its stake in Rio to 18%.
“I think we should be selling the milk, not the cow and in this case, the minerals, not the mine,” independent senator Nick Xenophon said Wednesday on Australian radio.
Senator Barnaby Joyce, an Australian politician who took out television ads on Tuesday urging the blockage of the Chinalco deal, Reuters reported.
“The Australian government would never be allowed to buy a mine in China. So why would we allow the Chinese government to buy and control a key strategic asset in our country,” the ad said. The ads aired in the capital of Canberra and Joyce’s home state of Queensland, where Chinalco will mine new assets.
Chinalco’s bid for Rio Tinto is just one of many overseas acquisitions being made by Chinese companies, as the nation scrambles to lock in long-term supplies of resources at low prices.
In February, China Minmetals made a $1.7 billion (A$2.6 billion) bid for OZ Minerals (ASX:OZL), the world’s second leading zinc miner. Hunan Valin Iron & Steel Group Co. quickly followed that deal with an agreement to buy $793 million (A$1.2 billion) worth of shares in Fortescue Metals Group Ltd. (ASX:FMG), which has significant iron ore holdings in Australia’s western states.
In February, China Minmetals made a $1.7 billion (A$2.6 billion) bid for OZ Minerals Ltd., the world’s second leading zinc miner. Hunan Valin Iron & Steel Group Co. quickly followed that deal with an agreement to buy $793 million (A$1.2 billion) worth of shares in Fortescue Metals Group Ltd., which has significant iron ore holdings in Australia’s western states.
“I think the Coke decision will backfire on China,” an unidentified dealmaker told the Financial Times. “It will embolden nationalists in countries like Australia, who are unhappy with all these resource deals.”
News and Related Story Links:
- Financial Times:
Coke’s rejection is to Chinese public’s taste
Comment by PB on 19 March 2009:
During privatization in the Czech Republic, Coca-Cola announced a bottling and distribution deal for the country’s second largest city, Brno, with a company named Fruta Modrice.
Of course, Fruta Modrice’s share price skyrocketed.
After enough normal people got sucked into buying Fruta Modrice shares on the basis of this “good news”, Coca-Cola announced that they were terminating the agreement because Fruta Modrice’s bottling equipment wasn’t up to standards. (Didn’t Coca-Cola check the equipment **before** announcing the deal?)
The situation with China Huiyuan Juice Group’s shares seems very similar.
Comment by Bennett Dy on 19 March 2009:
3/19/09 10:35 AM US CT
If the acquisition of Huiyuan Juice Company were successful, the following scenarios could happen:
First: with the added asset and aggressive management of Coca Cola, it might start acquiring other smaller juice companies. This will reduce competition and hurts consumers
interest;
Second: since Huiyuan Juice is a big competitor and the Chinese prefer fruit juice which is more nutritious, Coca Cola might slowing weaken Huiyuan market share by slowly weaken its operation by many means, such as abandoning land that produce the fruits for the juice, or reducing it’s distribution channels and many other steps that will accomplish the objective: to remove Huiyuan as competitor.
Third: Huiyuan is a very successful domestic producer, its success contribute to many sectors of the economy, labor, fertlizers, transportation. It has a brand name and its products are distributed throughout the the world. Any chance that a mishap could happen to this company after acquisition by Coca Cola is tantamount to a national loss and will grief most Chinese.
We must remember, Coca Cola is buying Huiyuan, which means it will own Huiyuan and can do anything with it; this is quite different from other companies that purchase shares (less than 50%) of other Chinese companies with no overiding votes in running those companies. The Chinese Commerce Department made a very wise decision.
We couldn’t take any chance that any of the above cited events might occur after Coca Cola acquire Huiyuan so I fully agree with its decision.
Bennett Dy