Nationality comes first in mergers and acquisitions

PUBLISHED : Saturday, 25 July, 2009, 12:00am
UPDATED : Saturday, 25 July, 2009, 12:00am

For anyone who has any doubt about the mainland's stance on the sale of domestic businesses - remember the Coca-Cola bid for China Huiyuan Juice Group that was rejected by Beijing? - just listen to Ning Gaoning.

'When a mainland enterprise picks its partner in the future, isn't min zu xing (nationality) more important?' said Mr Ning, the chairman of China National Cereals, Oils and Foodstuffs Corp (Cofco), earlier this month. 'Do we have to make a distinction between state ownership and private ownership when we are talking about the same nationality?'

In short, nationality comes first in mergers and acquisitions.

This man knows what he is talking about. Mr Ning is a veteran state businessman who has walked China's corridors of power for decades as the anchor of state-owned China Resource Group before 2005 and the even bigger Cofco now.

More importantly, the straight-talking executive has just managed to grab control of the country's largest dairy producer, without having to tackle any regulatory hurdles. His quotes are from a press conference about the deal.

Cofco, together with home-grown private equity firm Hopu Investment, bought 20.02 per cent in China Mengniu Dairy for HK$6.12 billion to become the largest single shareholder. Mengniu's founder, Niu Gensheng, and his associates sold down their stake to 7.29 per cent.

Despite the tainted milk scandal, Mengniu remains a prime asset by any measure. It carries a household brand. It has a sophisticated sales and distribution network. It controls about 40 per cent of the country's liquid milk market while its two top rivals share another 30 per cent.

Yet here, it has just changed control without any noise - no regulatory hassle, no anti-monopoly hearing.

This is in sharp contrast to the fate of Coca-Cola's HK$19.65 billion pursuit of Huiyuan, the country's biggest juice producer which controls more than 30 per cent of the mainland juice market. Though welcomed by its shareholders, the Ministry of Commerce rejected the bid on anti-monopoly grounds after eight months of negotiations.

The two cases may not be exactly the same, but there are some striking similarities that leave one wondering why the authorities have treated them so differently.

In rejecting Coca-Cola's marriage with Huiyuan, the ministry used the 'bundled sales' argument that it said would squeeze out competitors. 'The deal will give Coke the competence of transmitting its dominance on the carbonic acid drink market to the fruit juice market by bundling the sales [of fizzy drinks and juices] or other offerings excluding market competition,' the ministry said. 'Then consumers will have fewer choices at higher prices as the competitiveness of other fruit juice makers is severely impaired or even deprived.'

Cofco is not Coca-Cola, but it is the largest bottling partner of the American giant in China that not only bottles the fizzy drink but also distributes it along with other Coke-owned products.

Shouldn't the ministry also be asking if Cofco can bundle the sales of Coke with milk? If the answer is yes, does Cofco have an anti-monopoly concern to address as well?

I am not saying there is an anti-monopoly case to be answered.

Cofco may well argue that it will not be involved in the management of Mengniu - it will have three non-executive seats on the 13-strong board. Neither does it have any other dairy business, unlike Coca-Cola, which also owns some juice business.

But the fact is the deal will make Cofco the largest single shareholder; Mengniu has made no secret of its intent to buy out rivals given Cofco's deep pockets, and Cofco has promised to make Mengniu its sole dairy business platform.

Shouldn't this have set off alarm bells with Beijing's anti-monopoly watchdog, which measures whether the buyer has any control or decisive power through a stakeholding or strategic agreement and whether the merger may have the effect of restricting competition?

But so far the watchdog has been silent. So have other authorities.


A month short of its first birthday, the anti-monopoly bureau has had a part to play in three high-profile mergers that all happen to have involved foreign buyers.

Other than the Coca-Cola deal, it has significantly altered InBev's US$52 billion acquisition of Anheuser-Busch and Mitsubishi Rayon's US$1.6 billion acquisition of Lucite International.

I hope you now see why I advise you to take heed of Mr Ning's statement on nationality.

By the way, Mr Ning also said: 'In the future, there will be increasing co-operation between state-owned and privately owned enterprises. I call this PPP - public-private partnership. That's the solution to the so-called financial crisis.'

That is for sure. Given the min zu xing issue and the difficulty in getting long-term bank loans, who else can the cash-strapped private enterprises turn to but state-owned firms that are rich in cash and short on entrepreneurship?

Yes, expect more PPPs.