Failed Coke bid puts squeeze on Huiyuan

PUBLISHED : Friday, 20 March, 2009, 12:00am
UPDATED : Friday, 20 March, 2009, 12:00am

Zhu Xinli, chairman of China Huiyuan Juice Group, would have earned a HK$7.55 billion cheque if Coca-Cola's HK$19.65 billion bid for his 17-year-old company went through.

The son of a poor Shandong farming family had longed for a successful deal, and to use the proceeds to realise his ambitions in the fruit plantation business.

But Beijing's rejection of Coke's bid on Wednesday now looks set to trigger a sea change underlined by an evaporation of HK$4.58 billion - based on market value - of Mr Zhu's personal wealth.

Yesterday, Huiyuan's Hong Kong-listed shares plunged 42.17 per cent to HK$4.80, a level similar to the stock's price before what would have been the biggest foreign takeover of a mainland company was announced. In tandem, Mr Zhu, who owns 619.14 million shares, or 42.15 per cent of the firm, saw his fortune plummet to HK$2.97 billion.

Analysts and market watchers said although there was no clear winner in Coke's failed bid, the entrepreneur, who rose to fame as a judge on the mainland version of the US reality television show, The Apprentice, and Huiyuan were the biggest losers.

Bocom International analyst Gary Lau said if Huiyuan continued to seek a share sale, the price it could command would be at a huge discount to Coke's exceptionally high HK$12.20 per share amid globally falling asset prices. 'And a possible merger or acquisition needs to be scrutinised again by the Ministry of Commerce under anti-monopoly law.'

Worse still, Mr Zhu had not only lost money, but also credibility among consumers, said Mei Xinyu, a researcher at the ministry's Research Institute of Foreign Trade and Economic Co-operation. 'He used to be a respected entrepreneur, but his comments in public for the deal changed all this. Consumers reacted negatively to his business philosophy, which has damaged Huiyuan's brand value.'

Mr Zhu ignited a public outcry last September when he declared that brands should exist without borders and entrepreneurs should run their companies like they were 'sons' but sell them like they were 'pigs'.

In an interview with the South China Morning Post in February last year, he claimed he was devoted to being a responsible entrepreneur and cared about the livelihoods of mainland fruit farmers. His aide yesterday said he was abroad and unreachable for comment.

Since the announcement of Coke's takeover offer, many Web commentators have branded him a 'traitor' and he has been under mounting pressure from adverse public opinion for attempting to sell a homegrown brand to foreigners.

With the deal scrapped, Mr Zhu is under another form of pressure: running Huiyuan, which is expected to face stiffer competition, including that from former suitor Coke, and a tougher marketplace in the economic slowdown.

'Huiyuan stands to lose as Coke will proceed with its US$2 billion China expansion plan, which is more than it has spent in China since it entered the market in 1979,' said a CIMB-GK report.

Coke spokesman Kenth Kaerhoeg yesterday said the company would focus on developing existing brands, while continuing to innovate with new brands, including in the juice segment. The US beverage giant has been aggressive in developing non-carbonated drinks on the mainland over the last three to four years.

The strong performance of its Minute Maid fruit-juice drinks has already helped Coke move to the top position in the fruit and vegetable juice sector, accounting for 11.8 per cent of the market by sales volume last year, according to data from Euromonitor International.

By comparison, Huiyuan's market share in the sector slipped to 8.5 per cent last year from 10.3 per cent in 2007.

In September last year, Huiyuan reported a 5.2 per cent drop in sales and 22.2 per cent slump in gross profit for the six months to June, with cash dropping to 666.25 million yuan (HK$756.33 million) from 1.29 billion yuan a year earlier.

JP Morgan analyst Selina Sia forecast that its business performance this year could deteriorate further if consumption sentiment became worse.

'We believe that the group's low utilisation rate and heavy working capital requirement have resulted in low returns when compared with peer group consumer companies,' Ms Sia said.

Speculation that Huiyuan might be running into cash-flow trouble was rife after the company released its interim results, allegations that were denied by Mr Zhu.

Mr Zhu started his business with a near-bankrupt canned fruit plant in Shandong province after resigning from a local government bureau.

The company was initially engaged in the export business and sold juice concentrates to Europe and the United States. It later shifted its focus to the domestic market, capitalising on the mainland's growing standard of living and demand for healthy drinks.

After Coke's failed bid, Mr Zhu's days ahead are not likely to be easier, with the company's prospects and his professional reputation at stake.

Talk of Mr Zhu cashing out has resurfaced.

'Yes, I wouldn't be surprised if some of the major shareholders, even Zhu Xinli himself, cut back their positions amid yesterday's price avalanche,' said one analyst.

But if there was any comfort, the brand Mr Zhu said he painfully built remains in his hands, at least for now.

Additional reporting by Martin Zhou