China's Coke Decision Threatens to Chill Investment

[Coke China]

Lawyers and investment bankers said China's rejection of Coca-Cola Co.'s $2.4 billion bid for China Huiyuan Juice Group Ltd. could prompt a backlash against Chinese investing abroad as it risks chilling investment within the country.

China's Commerce Ministry said Wednesday that the combined company's market power could "narrow the room for survival" of smaller players in China's beverage industry and lead to higher prices for consumers. Coke might use its dominant position in the carbonated-beverage market to restrict competition in the juice business, the ministry said.

Coca-Cola is the largest seller of carbonated soft drinks in China, with a 52.5% market share, according to research firm Euromonitor. Huiyuan, meanwhile, is China's largest maker of 100%-juice drinks, with a 33% market share. Coke also sells juice drinks, and the two companies' combined share of the fruit-and-vegetable juice market last year was 20.3%, according to Euromonitor.

The ruling -- the first major test of a new antimonopoly law -- sends "a very negative message," said Lester Ross, an attorney in U.S. law firm WilmerHale's Beijing office, who wasn't involved in the deal. "I think it was driven by protectionism, fueled by popular resentment against a foreign company acquiring a popular Chinese brand."

Mei Xinyu, a researcher at the Chinese Academy of Trade and Economic Cooperation, which is affiliated with the Commerce Ministry, said the ruling had "nothing to do with trade protectionism."

The deal did, however, block what would have been the largest-ever takeover of a Chinese company by a foreign buyer.

Merger-and-acquisition lawyers who weren't involved in the deal said the ministry's statement indicates that officials appeared to rely on broader definitions of anticompetitive harm than used by their counterparts in the U.S. The ministry's statement implied that a company's overall size, in addition to its share of any given market, should be taken into account, these lawyers said.

Yi Xianrong, a researcher in the finance and banking section of the government-backed Chinese Academy of Social Sciences, criticized the ministry's rejection, saying it was "groundless" given the intense competition in the industry.

Lawyers and bankers said higher antitrust barriers from Beijing could further hinder companies trying to conduct deals and invest in China, where it long has been difficult to acquire assets from state-owned companies. The Finance Ministry on Wednesday announced rules that make it harder for foreign investors in financial-services businesses to buy or sell their stakes. This follows moves by some foreign banks in recent months to sell holdings in Chinese banks.

Meanwhile, perceptions that China is hostile to foreign investors could hurt Chinese companies looking to take advantage of low prices to invest abroad, particularly in oil, metals and other natural resources that Beijing sees as critical to sustaining the nation's economic growth.

The government is looking to loosen those reins further, issuing rules Monday that reduce regulatory hurdles for Chinese companies looking to invest overseas. Last week, China's minister of commerce, Chen Deming, called on the global community to "jointly oppose trade protectionism." In the past two years, the value of deals struck by Chinese companies overseas has far exceeded that of deals made by foreign companies in China.

The Commerce Ministry said Wednesday that it had attempted to negotiate with Coca-Cola for a more limited deal that would ease the anticompetitive effects of the acquisition but that the company's response didn't go far enough to address its concerns. Coke didn't comment beyond its prepared statement expressing regret the deal was killed.

Coke's effort to acquire Huiyuan met with public criticism in China. Shortly after the deal was announced, a poll of about a half-million people by Web portal Sina.com showed that nearly 80% of participants opposed the transaction.

Chinese executives also were critical. Yang Xiulin, the marketing director of beverage company Hangzhou Wahaha Group Co. said "if national brands are gone, for the long term, it's not good for the Chinese industry."

The roles have been reversed, however. In 2005, state-controlled Cnooc Ltd. attempted to acquire Unocal Corp. of the U.S. for $18.5 billion, only to withdraw within weeks amid intense political pressure in the U.S. While Cnooc's deal-making inexperience contributed to its difficulties, opposition from U.S. lawmakers surprised China and left many in the country believing the U.S. wouldn't stand by its own open-markets rhetoric.


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