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SNAP ANALYSIS: In blocking Coke, a chilling message

By Jason Subler and Kirby Chien, Reuters
March 19, 2009

BEIJING (Reuters) - China on Wednesday rejected a $2.4 billion bid by Coca-Cola (KO.N: Quote, Profile, Research, Stock Buzz) for China's top juice maker, Huiyuan Juice (1886.HK: Quote, Profile, Research, Stock Buzz), blocking what would have been the largest-ever takeover of a Chinese company by a foreign rival.

Here are some of the possible repercussions:


The Ministry of Commerce's ruling, on grounds that the merger would have been bad for competition, was the biggest test yet of how Chinese officials would implement a tough anti-monopoly law enacted last year.

Until last week executives and lawyers had expected the deal to pass scrutiny, albeit with strings attached, especially after Coke recently agreed to invest an extra $2 billion in China.

Instead, the ruling will fan fears that the ministry will rule not on narrow market-concentration grounds but on the basis of provisions in the law permitting it to consider China's national economic development and the protection of well-known brands.

"It indicates that the Ministry of Commerce is going to take a very hard look at foreign acquisitions of leading Chinese brands, even if the foreign acquirer has little or no market penetration in that particular segment of the market," said Lester Ross, managing partner with the WilmerHale law firm in Beijing.

By setting a high bar for deals to be approved, the ruling will make other foreign bidders think long and hard before embarking on a takeover -- even if it is friendly and priced at a rich premium, as was the case between Coke and Huiyuan.

"From a purely competitive point of view, I don't think this would have affected the Chinese market. Maybe there are other factors that affected the decision," said Michael Gu, a partner with Zhong Lun Law Firm.

"It is a really bad example," he said of the ruling. "It will have a negative impact on foreign investment."

But Selina Sia, a beverages analyst with JPMorgan in Hong Kong, said the ruling was self-evident because the two companies would have held 40 percent of China's fruit juice market.

"If Coke were to take over Huiyuan, it would dominate the soft drink market in China, which would not only hurt consumers, but also other participants," she said. "Not only China, but every country has the same rules on monopolies."


No matter whether it is justified or not on anti-monopoly grounds, the ruling will fan concerns that economic nationalism is on the rise in China -- as elsewhere -- as the crisis deepens.

"This deal attracted so much attention from nationalists and protectionists," said Gu.

Even before the promulgation of the anti-monopoly law, China used existing regulations to fend off takeovers of companies deemed to be of national importance.

Last year, after three years of talks, U.S. private equity giant Carlyle Group CYL.UL walked away from a plan to buy Xugong, China's biggest construction equipment maker, for $375 million, after a campaign to keep the firm in Chinese hands stiffened the bureaucracy's opposition to the deal.

China has no monopoly on protecting branded foods. France famously put a "not for sale" sign over Danone (DANO.PA: Quote, Profile, Research, Stock Buzz), a yoghurt maker, after Pepsico Inc. (PEP.N: Quote, Profile, Research, Stock Buzz) said it was interested in the firm.

China's ruling Communist party faces no political opposition, but it is sensitive to views expressed on the Internet, where opinion has been heavily against selling to foreigners a brand held to be of national value, even though Huiyuan was founded only in 1992.

"In this instance, we know from domestic press accounts that there was a lot of political concern aroused about this acquisition. It was a voluntary acquisition -- a willing seller, a willing buyer -- and yet there was a lot of domestic opposition," Ross at WilmerHale said. "And that is very likely to have influenced the decision by the Ministry of Commerce.


A tantalizing question is whether the rejection of Coke's bid will influence the attitude of regulators in Australia and elsewhere who have to rule on a raft of bids by Chinese companies, especially in the natural resources sector.

Political opposition intensified in Australia on Wednesday against miner Rio Tinto Ltd's (RIO.AX: Quote, Profile, Research, Stock Buzz)(RIO.L: Quote, Profile, Research, Stock Buzz) planned $19.5 billion tie-up with Chinese state-owned aluminum firm Chinalco, with a key independent Senator saying he opposes the deal.

"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," Ross said.

"It seems very unlikely the Ministry of Commerce would have reached this decision without higher political clearance," he added. "If that's the is entirely natural to anticipate that other countries will regard acquisitions by Chinese companies in a very similar way."

(Reporting by Kirby Chien, Jason Subler and Michael Wei; Writing by Alan Wheatley; Editing by Ken Wills)

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