Coke’s FDI Mixer: Juice, Brand, Health, and Politics

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There has been plenty of foreign direct investment (FDI) into China over the years, and it is continuing strongly (with the help of the RMB) despite lots of laws, regulations and rising costs, many of which have been reported on this blog.

The last time we mentioned big FDI, it was in relation to China’s new anti-trust (anti-monopoly) law , now it is the turn of Coke to shake things up – with their US$2.4 billion bid for Huiyuan Juice Group. MarketWatch reports:

    “The deal would value the firm at about three times its market value, and would mark the U.S. beverage maker’s largest acquisition in China by value to date. …The Chinse firm is reportedly the country’s largest maker of pure fruit juice. Coca-Cola said three of the Huiyuan’s biggest shareholders have given “irrevocable undertakings” in support of the deal.”

In the context of China’s not inconsiderable challenges (especially in relation to high-profile, big bucks, cross-border M&A – see some here and here), Stan Abrams over at China Hearsay notes a good point:

    “What’s interesting is the news coverage…The major guys out there, like the NYT, WSJ, FT, are reporting correctly that Coke “plans to acquire” Huiyuan. Much lazier journalists talk about the deal in the past tense, with some commentators out there congratulating Coke on its “recent acquisition.”

    The China/Asia commentariat go one step further to discuss the regulatory hurdles that the deal will have to overcome. The usual legal authorities are quoted regarding the Anti-monopoly Law, the M&A Rules, and the opportunity for the government here to use Huiyuan’s famous trademark, or alternative strategies, to block the deal.

    Perish the thought that a big cross-border merger might be blocked by a government for political reasons!”

And political interest there may be, as Access Asia notes in their latest newsletter:

    “Huiyuan has a roughly (they’re all rough) 15% share of the China’s juices and juice drinks market, Coke has approaching 10%, combine that and you have a national market share about as big as it gets in most consumer product sectors in China.”

That sort of market share is unlikely to go unnoticed (even if, as the newsletter also points out, Coke will be aligning itself with the local health lobby). Nevertheless, this sort of thing is likely to be seen again and again, as China’s business landscape continues to be reshaped. Access Asia goes on to say:

    “…most sectors in China are populated by too many companies, many technically bankrupt, are regionally constrained and most making cheap rubbish at cheap prices. This creates too much competition from overcrowding, which kills margins. Hence, most sectors need consolidation, big players buying out smaller ones, creating larger market leaders who can quickly kill off the rubbish companies, and then go about raising efficiency in the market to improve profits, and the raise the bar by introducing added-value products aimed at the rising incomes of the consuming classes. Coke needs to be ahead of its foreign competitors in taking over the fast-growing fruit juice sector, so it intends to buy the leading domestic company”.

It sounds like a good move, but we would not recommend popping the Champagne corks just yet. Perhaps just a can of cheap, brown, fizzy stuff for now.

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One Response to “Coke’s FDI Mixer: Juice, Brand, Health, and Politics”

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