Coke-Huiyuan deal poses a thorny problem for Beijing
The proposed HK$19.65 billion takeover of China Huiyuan Juice Group by Coca-Cola presents the mainland authorities with an interesting dilemma.
On one hand, no company is more American than Coca-Cola. So if Beijing wants to get its own back for CNOOC's blocked 2005 takeover of United States oil company Unocal, this would be the perfect opportunity.
On the other hand, to adopt such an attitude would be puerile. Beijing desperately wants to recycle capital abroad by investing in foreign companies. With many US assets now looking cheap, this would be a lousy time to indulge in a tit-for-tat round of investment protectionism.
Clearly some investors think that is exactly what is going to happen, however. After rocketing 173 per cent on Tuesday following the deal's announcement, Huiyuan's shares slipped back almost 8 per cent yesterday (please see the first chart below). At the close, they were priced at a hefty 17 per cent discount to Coke's HK$12.20 offer price, reflecting fears that either the takeover will be rejected outright, or that it will be tied up in regulatory red tape and delayed indefinitely.
Either is possible. Although the Huiyuan deal would not be the biggest overseas acquisition on the mainland (see the second chart), most deals so far have involved the purchase of a minority stake with little or no management control. Beijing, however, may well balk at a complete takeover.
If mainland officials do decide to block the deal, they have plenty of tools at their disposal. Last year Beijing passed a law allowing it to prohibit foreign takeovers of mainland companies in so-called strategic sectors like mining, power generation, petrochemicals and aviation, citing national security grounds.
While an orange juice bottler can hardly be considered essential to the defence of the nation, an additional clause allows Beijing to block acquisitions of famous brand names in the interests of 'economic security'.
With Huiyuan ranked among the mainland's top 25 domestic brands by the China Brand Union Association, the company may well be famous enough for officials to want to skewer the deal.
If they did, it would strike a popular chord; yesterday, Xinhua was reporting that 76,000 people had voted against the deal in an online poll.
Of course, given that Huiyuan is a Cayman Islands-registered company listed in Hong Kong and owned largely by foreign shareholders, it is questionable whether the economic security argument can really apply.
The alternative would be to block the deal under competition legislation that only came into force last month and remains completely untested. Lawyers - and very likely government officials as well - have only the sketchiest idea how it will actually be implemented.
The new law decrees that no one company may command greater than a 50 per cent share of the market. But this begs the question: what exactly constitutes the market?
If you consider the whole soft-drink market, or even the 'juice drink' sector, then the Coke-Huiyuan combination would come in comfortably below the threshold. But if you take the 100 per cent fruit juice market, in which Huiyuan is the clear leader with an estimated 43 per cent share, it is likely there are grounds for complaint.
Jurisdiction will lie with the Ministry of Commerce, which is hardly renowned for its fondness for foreign enterprises. Even so, an outright rejection of Coke's offer is unlikely. That would risk stoking anti-China sentiment in Washington at a time when mainland companies are themselves on the acquisition trail.
Far more probable is that the proposed deal will get inextricably tangled up in a thicket of impenetrable regulation.
That is what happened to US private equity company Carlyle's attempted acquisition of mainland digger manufacturer Xugong Group. That deal finally lapsed in July after three years of fruitless negotiations, allowing officials successfully to avoid having to resolve their dilemma.
