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2009-03-19 | All chapters

Chinese Government Rejects Coca-Cola Bid For Huiyuan Juice
Gordon Fairclough and Jin Jing, Dow Jones, 18th March 2009

SHANGHAI -(Dow Jones)- China's government rejected Coca-Cola Co.'s (KO) $2.4 billion bid to acquire one of China's largest juice makers, saying the deal - which would have been the largest-ever foreign takeover of a Chinese company - would unduly restrict competition.

The decision, announced Wednesday by the Ministry of Commerce, was the first major test of the country's strengthened anti-monopoly law and could have a chilling effect on merger-and-acquisition activity in China, as well as on foreign investment in the country generally. It could also complicate efforts by China's own companies to make overseas acquisitions.

In a statement released Wednesday afternoon in Beijing, the Commerce Ministry said that if Coca-Cola were allowed to acquire the juice maker, China Huiyuan Juice Group Ltd. (1886.HK), the combined company's market power could "squeeze out" smaller players in China's domestic beverage industry and lead to "higher prices" for consumers.

Huiyuan is China's largest juice maker. Its share of China's pure-juice sector, in terms of sales value, was 32.6% of that market by the end of the year, according to market research firm Euromonitor, a lower share compared with 44% at the end of June.

The ministry said that it had attempted to negotiate with Coca-Cola for a more limited deal that would mitigate what it considered the anti-competitive effects of the acquisition. But the ministry said that Coca-Cola's response didn't go far enough to address its concerns. The ministry didn't elaborate on what types of restrictions it had sought.

A Coca-Cola spokesman in Hong Kong said the company had no immediate comment.

Coca-Cola agreed in September to acquire Huiyuan as it moved to buy its way into fruit-juice businesses in various global markets. The deal would have been Coca-Cola's largest overseas acquisition and would have been the second-largest in the beverage maker's history, after its $4.1 billion acquisition of Energy Brands Inc., maker of Glaceau Vitaminwater, in 2007.

Earlier this month, as it was waiting for Beijing's ruling, Coca-Cola said it plans to invest $2 billion in China over the next three years, on top of the $ 2.4 billion it had earmarked for acquiring Huiyuan.

The rejection of the deal could give ammunition to China's critics, who argue that Beijing is asking other countries to open its markets to foreign investment as it maintains significant limits at home. Chinese officials, including Premier Wen Jiabao, have been warning vigorously in recent months against protectionist moves in the U.S. and other countries amid the global economic crisis.

Shi Jiangang, an analyst at TX Investment Consulting Co., said, "The issue will likely give other countries an excuse to reject China's investments overseas. Though it seems that the decision can protect the domestic industry in the short term, for Chinese companies looking for overseas expansion, they may lose the best timing and prices to acquire assets."

The American Chamber of Commerce in China declined to comment on the ruling, while the European Union Chamber of Commerce in the country said it hopes "the reasons behind the decision to reject the bid will be made publicly available in the near future."

Yi Xianrong, researcher at the Institute of Finance and Banking of the Chinese Academy of Social Sciences, a government think tank, called the stated reason for the rejection "groundless." He said the deal is unlikely to result in a monopoly in the beverage market, which he called a "fully competitive industry," and said the government bowed to pressure from domestic media, especially from nationalist comments on Internet discussions of the deal.

A researcher at the Ministry of Commerce said regulators worried during the approval process that a rejection would hurt foreign investment in China but reasoned that amid the global slowdown China's still-growing economy would still attract investment.

Commenting on reports that the ministry asked Coca-Cola to relinquish the Huiyuan brand as a condition for approval, he said, "Actually giving up the brand would be the only solution to satisfy the anti-monopoly law."

Qiang Li, a partner at O'Melveny & Myers, said, "In certain foreign investor transactions in the U.S., the acquirer was required to divest a part of the target. [The Ministry of Commerce] may have taken such precedents into account."

He also said that the ruling will be instructive for foreign investors looking to acquire a business in China with a famous trademark.

China ruled on the deal as a number of Chinese companies are venturing abroad to invest. In a sign of the potential hurdles Chinese firms face in their overseas push, Australia said Monday it has extended a review of Aluminum Corp. of China's planned $19.5 billion investment in Rio Tinto Ltd.

Earlier this month, China's Ministry of Commerce led a delegation of officials and business leaders to Europe to explore investment opportunities there in a range of industries. That trip followed a larger Chinese delegation to Europe that announced billions of dollars in purchases of goods in four European countries, a trip that was aimed at pushing for open markets.

Chinese officials and executives complained bitterly about U.S. resistance to foreign investment after the rejection in 2005 of China National Offshore Oil Corp.'s planned $18.5 billion bid for Unocal Corp. of California - a far bigger deal in a more strategically important, if also more fragmented, industry.

Source: http://money.cnn.com/news/newsfeeds/articles/djf500/200903180615DOWJONESDJONLINE000428_FORTUNE5.htm