BEIJING/HONG KONG (Reuters) - China has rejected Coca-Cola’s planned $2.4 billion acquisition of top juice maker Huiyuan Juice, saying the deal would have been bad for competition.
The acquisition by Coca-Cola would have been the largest-ever buyout of a Chinese company by a foreign rival, but was rebuffed in what is sure to be seen as another sign of the protectionism that has been mounting globally as much of the world is gripped by recession.
“The message is particularly significant given Coke’s good corporate-citizen status so visible during the high-priority Beijing Olympics project, as well as its pledge of $2 billion of additional investment in China,” said Credit Suisse analyst Carlos Laboy.
Observers said China’s ruling on Coke could cut both ways in that Chinese companies that have been making increasingly high-profile acquisitions abroad may run into trouble of their own.
Australia’s Foreign Investment Review Board is considering three big investments by Chinese state-run companies in its mining sector.
In particular, political opposition to Rio Tinto Ltd’s planned $19.5 billion tie-up with Chinese state-owned Chinalco has been intensifying, and on Wednesday the Australian Senate said it would launch its own inquiry into foreign investment.
“It indicates that foreign acquisitions of Chinese companies, particularly those with prominent brands, will not be regarded favorably by the Ministry of Commerce,” said Lester Ross, managing partner with the WilmerHale law firm in Beijing.
“And that, conversely, indicates that Chinese companies seeking to make acquisitions overseas may encounter an adverse reaction in those markets, if foreign companies are essentially frozen out of the Chinese market in terms of expansion through acquisition,” he said.
Ross said it was very unlikely the Chinese ministry would have made its decision without higher political clearance and, if that is the case, “it’s entirely natural to anticipate that other countries will regard acquisitions by Chinese companies in a very similar way.”
China’s Ministry of Commerce rejected the transaction under an anti-monopoly law enacted last year, saying in a statement that Coca-Cola’s changes to the deal were insufficient to allay its concerns.
Coca-Cola, the world’s largest soft-drink maker, said it held a long-term view of the Chinese market and would now focus on increasing sales of existing brands and innovating with new ones.
“We are disappointed, but we also respect the MOC’s decision,” said Chief Executive Muhtar Kent in a statement. An official with Huiyuan could not immediately be reached.
Gary Bradshaw, a portfolio manager at Dallas-based Hodges Capital Management, called the rejection “a minor setback” for Coca-Cola rather than “a major slap in the face.”
“They’ll probably regroup and try to go at it from a different angle,” Bradshaw said. Hodges owns Coke shares among its $750 million in assets under management.
Given the deal’s high multiple and Huiyuan’s weakening growth outlook, Stifel Nicolaus analyst Mark Swartzberg said he saw the news as positive.
Swartzberg noted that Coke had suspended its share repurchase program when the deal was announced, and said he now believes it will be resumed.
A Coca-Cola spokesman said it was premature to comment on buybacks.
JPMorgan analyst Selina Sia said the two companies would have held a combined 40 percent of China’s fruit juice market, and the ruling was not a surprise.
“If Coke were to take over Huiyuan, it will dominate the soft-drinks market in China, which not only hurts consumers, but also other sector participants,” she said.
Huiyuan controls more than a tenth of a Chinese fruit and vegetable juice market that grew 15 percent last year to $2 billion. Coca-Cola has a 9.7 percent market share and dominates in diluted juices.
China is Coke’s fourth-largest market and a key battleground with rival PepsiCo Inc.
Jeffery Lau, an analyst with Polaris Capital in Hong Kong, said the ruling confirmed that China remains unwilling to allow the takeover of a national brand.
“But this is not exactly a huge surprise,” he said. “Protectionism has been on the rise everywhere this year.”
Last year, after three years of talks, U.S. private equity firm Carlyle Group walked away from a plan to buy Xugong, China’s biggest construction equipment maker, after running into bureaucratic obstacles.
China has itself been snubbed in overseas acquisitions, most notably in 2005 when U.S. political opposition blocked CNOOC Ltd’s $18.5 billion bid for oil company Unocal.
Shares of Huiyuan were suspended from trading earlier on Wednesday after slumping nearly 23 percent following a Financial Times report that Coca-Cola might drop its bid after Chinese antitrust regulators signaled it would have had to relinquish the Huiyuan brand after the acquisition.
Huiyuan shares had traded below Coca-Cola’s HK$12.20-per-share offer price, indicating investors doubted the deal would go through.
Coke shares were down 39 cents, or 0.9 percent, at $41.06 on the New York Stock Exchange in early afternoon trading.
Additional reporting by Jason Subler, Kirby Chien, Donny Kwok, Fion Li, Parvathy Ullatil and Martinne Geller; Editing by Ian Geoghegan, Lisa Von Ahn, Tim Dobbyn