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Coca-Cola puts new takeover law to the test

By Zhou Yan (China Daily)
Updated: 2008-09-05 06:58

SHANGHAI: The Coca-Cola Company's $2.3 billion bid for premier juice maker China Huiyuan Juice may help the US company achieve dominance in China's beverage market. But analysts remain skeptical because of the many hurdles that could threaten to rock the marriage.

A customer takes a bottle of Coca-Cola next to packets of Huiyuan fruit juice at a supermarket in Jinan, Shandong province, September 3, 2008. [Agencies]

China is Coca-Cola's fourth largest market, and the proposed transaction would be the company's largest overseas acquisition. If the deal goes through, it could strengthen Coca-Cola's stranglehold in one of the world's fast growing beverages market.

The combined total sales of the beverage giant and Huiyuan would be 8 billion liters, lifting The Coca-Cola Company's share of China's soft drinks market from 16.3 percent to 18 percent, said Hope Lee, a non-alcoholic drinks analyst from Euromonitor International.

Related readings:  Coca-Cola offers $2.3b bid for Huiyuan

If the acquisition goes ahead, Coca-Cola will overtake France's Groupe Danone, which occupied a 16.3 percent share of China's soft drinks market in 2007, as the country's top brand with a 17.9 percent market share.

"Beset by shrinking demand for carbonated drinks in China, Coca-Cola has been held back by its unitary product line and has to come up with more diversified products to enhance its position, " said Teng Binsheng, a strategy professor from Cheung Kong Graduate School of Business.

The American company launched its Minute Maid juice in China last year as part of its aggressive expansion into the nation's fruit and vegetable drinks business, valued at $10.6 billion in 2007, while carbonated drinks only reached $7.4 billion, according to figures from Euromonitor.

The fruit and vegetable drinks market is set to grow 16 percent to $12.3 billion this year, much quicker than the 7 percent rise expected for carbonated drinks, Euromonitor estimated.

The deal "will enable Coca-Cola to greatly reduce its reliance on carbonated drinks," Lee said, and "still drinks' contribution to Coca-Cola's retail value sales will increase from 28 percent to 47 percent".

Huiyuan's strength is in pure fruit juice, where it has a 46 percent market share, according to ACNielsen figures.

"Coca-Cola will successfully convert its largest rival in soft drinks into its subsidiary," said Qu Honglin, a senior partner of Glocal Strategy Consulting Co.

Teng noted that it is a common move for foreign companies to purchase low- or medium-end brands when synergizing with local companies.

"Recent merger and acquisition activities between overseas and domestic enterprises, including Coca-Cola and Huiyuan, Johnson & Johnson and Dabao, and Schneider Electric and Delixi, all followed this trend," he said, adding that the acquisition would complete their product lines and meet Chinese customers' demand for medium-end products.

As for Huiyuan, analysts said that the company would also reap great benefits from the pending transaction, thanks to the rather attractive price offered by Coca-Cola.

"It's a good deal for Huiyuan, as a private company it has met a growth bottleneck due to a lack of financial support from banks and the government, " Qu said.

Teng said that Zhu Xinli, the founder and president of Huiyuan, "couldn't say no to such a price from Coca-Cola, particularly when China's equity market is suffering such a lean period", Teng said.

But how successful Huiyuan will be after the acquisition largely depends on strategies devised by Coca-Cola's top executives based in Atlanta, who will probably make the same mistakes as other multinationals synergizing with domestic brands, Qu said.

In addition, the two companies have to surmount several obstacles ahead of their marriage.

As it is the first major deal after the country's anti-monopoly law came into force on Aug 1, this transaction will be a major test of the new regulation, said Zhang Tao, a lawyer from Shanghai Zhongtianxin Law Firm.

"Regulators will probably subject the acquisition to very stringent checks," Zhang said.

Coca-Cola said in a statement that the success of the deal is subject to the approval of China's antitrust authorities.