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'.
