| HONG KONG
HONG KONG 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
It is followed closely by Coca-Cola, which already has a
9.7 percent share of the market and dominates in the area of
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 vitaminwater maker
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
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.
Huiyuan shares soared 170 percent on Wednesday, regaining
levels last seen in October 2007.
Three shareholders, including Danone, with a combined 66
percent in Huiyuan agreed to sell their stakes, Coca-Cola said.
Coca-Cola will now make a general offer for all shares, bonds
and options in Huiyuan.
The purchase would be the single largest takeover in China,
where inbound M&A is notoriously difficult given state
dominance of the corporate sector and regulatory red tape.
Nationalistic pride often triggers protests when foreign
companies gain influence over domestic businesses.
China's official Xinhua news agency has already warned that
this deal could face regulatory obstacles.
"There are two main difficulties," Mei Xinyu, a researcher
at the Chinese Academy of International Trade and Economic
Cooperation, a government think tank, told Xinhua.
"One is the large size of the two companies, which will
raise concerns about monopolies. The second is that the brand
of Huiyuan is considered to be protected as a famous domestic
brand," he said.
U.S. private equity firm Carlyle Group's [CYL.UL] $375
million offer for a stake in Xugong Group Construction
Machinery Co was scrapped in July after some Chinese officials
argued state assets would be sold to foreigners too cheaply.
Chinese inbound corporate deals so far are up 30 percent
from a year ago, to $15.3 billion, Thomson Reuters data show.
The Chinese juice market -- encompassing pure juice,
diluted juices and nectars -- is expected by analysts to grow
more than 10 percent in coming years, benefiting Huiyuan,
Tingyi (0322.HK), Uni-President (1216.TW) and others.
Sales of juice in China rose 15 percent last year to 13.6
billion yuan ($1.99 billion) and sales volume rose 12.3 percent
to 2.57 billion liters, based on AC Nielsen data from Huiyuan.
Coca-Cola said its Chinese sales rose 20 percent in volume
in the first quarter and 13 percent in the second quarter.
"Coca-Cola is looking to tap the pure juice market, where
Huiyuan is the market leader," said Emma Liu, analyst with
Nomura Securities. "Though it's a relatively small market in
the beverages space, it's a high-growth market because of the
growing personal income in China and increased health
Huiyuan said it controls about 43 percent of China's
pure-juice market and expects sales to grow five-fold in three
to five years to 10 billion yuan.
Shares of smaller competitors rallied, with Andre Juice
8259.HK jumping 11 percent as the broader market .HSI
dropped 2 percent.
The deal hands a whopping profit to Huiyuan's investors.
Danone, which has about 23 percent of Huiyuan, said it has
tendered its stake to Coca-Cola and expects a profit of about
100 million euros ($145 million).
U.S. private equity firm Warburg Pincus & Co also stands to
make a windfall, as its near-7 percent stake in Huiyuan is
worth around $175 million, up from a $62.5 million investment
Coca-Cola was advised on the deal by Royal Bank of Scotland
and Huiyuan was advised by Goldman Sachs.
(Additional reporting by Parvathy Ullatil, Tony Munroe,
Michael Flaherty, Joseph Chaney, Megan Davies and Martinne
Geller; Writing by Edwin Chan, Editing by Gerald E. McCormick
and Steve Orlofsky)