Coca-Cola/Huiyuan: Majority Ownership or Anti-Monopoly?

When Chinese regulatory authorities blocked Coca-Cola’s $2.4 billion bid for China Huiyuan Juice, China’s largest juice maker, last month, I was surprised, and I said so in my article on the subject. After all, the state has no holdings in it: it’s a private company, and a foreign one to boot, with its shares listed in Hong Kong. The company’s founder, Zhu Xinli, owns 36 percent of Huiyuan’s shares; France’s Group Danone SA, 23 percent; and the U.S. private equity firm Warburg Pincus LLC, 6.8 percent.

According to the Chinese government, the deal was blocked on anti-trust grounds. The government said the deal would allow Coke to dominate a huge segment of the beverage market. The commerce ministry said it was worried that Coke would “set up some exclusive terms to restrict competition in the juice market,” drive up consumer prices and squeeze out smaller beverage makers.

I would need to consult an anti-trust lawyer to determine the validity of the government’s arguments, but underneath it all, there is a great deal of speculation that the real reason had more to do with having a large foreign company like Coca-Cola control China’s largest juice company. The rejection of Carlyle’s bid to acquire majority control of Xugong Group, China’s largest construction equipment company, several years ago set off a wave of protectionist sentiment in China, and many consider Huiyuan Juice to be a continuation of that trend.

So, the question remains: Was the Huiyuan Juice deal rejected because it threatened the free operation of China’s beverage markets, or was it because Coca-Cola would control the company?

China’s regulators themselves may provide the answer indirectly. Over the weekend, it was announced that Coke and Huiyuan are in talks over a minority investment. According to people familiar with the situation, discussions are under way for Coca-Cola possibly to acquire a minority stake in Huiyuan Juice’s assets. Both companies are remaining flexible as to the type of deal that may be reached. In addition to Coke taking a minority stake in Huiyuan, the two parties might form a joint venture, or a new Chinese partner might be introduced to team up with Coke. Whatever deal is struck, a strategic relationship between Coke and Huiyuan is likely to have the same market impact as a takeover by Coke.

Presumably, this latest round of negotiations has gotten at least a “wink and a nod” from China’s regulators. If a minority deal is ultimately approved, we’ll know for sure that the real reason for the rejection of Coke’s bid for Huiyuan was the fact that Coke would control the company, not because the regulators were worried about competition in the country’s beverage markets.

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