Coca-Cola to buy Huiyuan in largest China takeover

By Alison Leung and Fion Li

HONG KONG (Reuters) - Coca-Cola Co (KO.N), the world's largest soft drinks maker, offered to buy juice maker China Huiyuan Juice Group Ltd (1886.HK) for a hefty premium, marking the biggest takeover in China by a foreign company.

The all-cash deal of $2.5 billion, which still requires regulatory approval, values Huiyuan at nearly three times its closing price on Friday.

Major acquisitions in China's fragmented consumer industry have slowed to a trickle in past years as companies grapple with fierce competition and a slide in margins. Local brand names are also known to resist foreign control, analysts said.

Huiyuan, more than one-fifth-owned by France's Danone (DANO.PA), controls 10.3 percent of a Chinese fruit and vegetable juice market that grew 15 percent last year to $2 billion.

It is followed closely by Coca-Cola, which already has a 9.7 percent share of the market and dominates in the area of diluted juices.

China is already Coke's fourth-largest market and a crucial battleground with rival PepsiCo Inc (PEP.N) -- it has twice Pepsi's soft-drinks market share with 15.5 percent.

Coke and Pepsi increasingly rely on developing markets like China, India and Russia for growth, as North American sales of traditional soft drinks like colas have slowed amid a growing consumer emphasis on health and an economic slowdown.

Coke is also trying to expand its portfolio of noncarbonated drinks to better compete with PepsiCo, which makes Tropicana juices, Gatorade sports drinks, Lipton iced teas and SoBe drinks.

The takeover of Huiyuan would be Coke's largest acquisition since last year's $4.1 billion purchase of vitamin water maker Glaceau.

Coca-Cola, which also makes Minute Maid juices, Powerade sports drinks and Aquafina bottled water, is paying a high premium to strengthen its grip on the domestic juice market, and it may have plans to sell Huiyuan's drinks abroad.

"The move is a big surprise to the market and the offer is super-generous," said Lawrence Chor, analyst at Tai Fook Securities. "It's very possible Coca-Cola will leverage the Huiyuan brand, acquire other Chinese juice makers, then boost their output for export."

Morgan Stanley analyst William Pecoriello said in a research note that the deal makes strategic sense, given that juice is one of Coke's key focus areas in China, along with carbonated soft drinks and bottled teas. Yet Coke investors "might at first react negatively to the high price paid."

Coke shares were down 30 cents at $51.66 in afternoon trade.

REGULATORY OBSTACLES

Coca-Cola agreed to pay HK$12.20 a share in cash -- 43 times Huiyuan's forecast 2008 earnings and nearly three times its Friday close of HK$4.14 -- for the 16-year-old company.