Mon, Sep 29, 2008 page11

• FEATURE : Coke tests China’s acceptance of M&As

  • AP
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  Coca-Cola’s friendly US$2.5 billion bid to buy China’s biggest juice maker is emerging as a test of whether Beijing will allow foreign companies to buy homegrown businesses — or force entrepreneurs to serve its vision of creating national economic champions.

  Huiyuan Juice Group Ltd (匯源果汁), little known outside China but with an estimated 42 percent of its pure juice market, could become a victim of its own success if Beijing deems it too big and famous to fall into foreign hands.

  Huiyuan’s green cartons of orange, apple, pear and grape juice are ubiquitous in Chinese grocery stores. Acquiring the company would expand Coke’s presence in a major market. For Huiyuan, which welcomes the deal, being acquired would give it access to experience at product development and marketing.

  The bid, announced on Sept. 3, has ignited a firestorm of criticism in China, where the state-controlled press and schoolbooks nurture grievances over colonialism. Angry comments posted on Web sites call Huiyuan founder Zhu Xinli (朱新禮) a traitor and demand that Beijing reject the deal.

  DISTASTEFUL?

  The government routinely defies public opinion when deciding on job cuts at state companies or other painful steps deemed necessary for China’s overall good. But Chinese leaders might share the public’s distaste about Coke because the bid collides with their goal of building major Chinese companies to dominate domestic industries.

  Beijing is likely to reject Coca-Cola Co’s bid for the very reasons Huiyuan is an attractive target — it is successful and well-known, warned Donald Straszheim, a US investment banker who specializes in China.

  “While the shareholders on both sides might approve, we do not see significant reasons why the authorities would approve this deal, allowing a major acquisition by a foreign firm of a highly visible domestic company,” Straszheim, vice chairman of Roth Capital Partners, said in a report to clients.

  Others say Coke might be able to win approval — and survive a review under China’s new anti-monopoly law — if it can make a case that the deal will benefit China. The US suitor says it will retain the Huiyuan brand and invest to develop it.

  “If Coke offers a really great amount of money, nationalism will yield to the money,” said Conita Hung (熊麗萍), director of equity markets for Delta Asia Financial Group (匯業財經集團) in Hong Kong.

  A Coca-Cola spokesman, Kenth Kaerhoeg, said managers have met with Chinese regulators but declined to comment on the review process.

  HUIYUAN EAGER

  A rejection would be a blow to Huiyuan, which welcomed Coke’s offer and said major shareholders, including French dairy group Danone SA, approved it. Huiyuan defended the deal as being in the best interests of the “Chinese economy as a whole.”

  Beijing issued rules in 2006 that bar foreign ownership of companies in power generation, weapons and other industries, but fruit juice makers are not mentioned.

  Foreign takeover bids have run up against similar protection in other countries.

  A Chinese oil company dropped a bid to buy US oil producer Unocal Corp. in 2005 after US critics claimed the deal would hurt national security. A US buyer took over Unocal, paying shareholders less than the Chinese bidder offered.

  China’s own companies are stepping up acquisitions abroad. Lenovo Group acquired IBM Corp’s personal computer unit in 2005. More recently, Aluminum Corp of China Ltd (中國鋁業) bought a stake in London-based Rio Tinto Group and Ping An Insurance Co (平安保險) bought a stake in Fortis NV, Belgium’s biggest financial services company.

  At home, Beijing actively pursues foreign investment and received US$52.4 billion in the first half of this year.

  Yet Beijing’s leaders’ attitude toward the outsiders who have helped to finance China’s boom is fraught with tension and conflict.

  INEPT CAPITALISTS

  The Internet-enabled public has often savaged Beijing as being inept in dealing with foreign capitalists. The government and its banks were criticized for buying too many Fannie Mae and Freddie Mac bonds and for taking a pre-IPO stake in the US investment group Blackstone LP — deals that have turned out poorly.

  That is likely to make the government leery of exposing itself to more criticism by selling off a high-profile name such as Huiyuan.

  Chinese regulators appear to prefer that foreigners invest in creating companies rather than buying existing outfits.

  In July, US investment firm Carlyle Group dropped an effort to buy control of Xugong Group (徐工集團), a maker of construction equipment.

  Regulators and Xugong’s domestic rivals opposed the deal even though the Chinese company sought Carlyle’s backing in order to expand.

  Foreigners are allowed to buy smaller companies, especially if they inject new money and technology.

  US-based Caterpillar Inc, the world’s biggest maker of construction equipment, bought one of its Chinese partners this year. Chairman James Owens said that deal went smoothly and won support from Chinese officials.

  The European Chamber of Commerce in China complained this month that Chinese companies increasingly invoke nationalism when seeking protection. The group’s president said companies would watch the Coca-Cola bid closely to see whether regulators follow the law or are swayed by politics.

  Unlike major Chinese banks, oil producers and phone companies, which were created by government decree, Huiyuan is part of a pioneering group of competitors that have succeeded by supplying products customers want to buy.

  TEST CASE

  The Coca-Cola offer also is seen as the first test of China’s new anti-monopoly law, which took effect last month.

  Foreign business groups welcomed the law as a step toward creating clearer business conditions. It forbids mergers that hurt competition but leaves regulators wide discretion in deciding how to decide that.

  “The government has not explained clearly how it will apply,” Susan Finder, a lawyer for the Hong Kong office of US firm Heller Ehrman, said in an e-mail. “Potential buyers of Chinese assets are waiting for more implementing legislation.”
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