Opinion | Juice brand's sweetheart deal gives shareholders bitter laugh
Huiyuan Juice struggles to make profits, but one of its suppliers, owned by the brand's founder, has been doing so well Huiyuan wants to buy it
Zhu Xinli, owner of Huiyuan Juice, once quipped: "I'm very good at making money." For the minority shareholders of the mainland's top juice brand, that would sound like a bitter joke. More so, because it is at their expense.
Since its listing in 2007, Huiyuan has gone from bad to worse. It reported 16 million yuan of profits last year, but that included 350 million yuan of government subsidy and fair value gains.
Huiyuan's management always blames rising raw material costs and fierce competition. Recently, however, shareholders came to learn that a puree and concentrate maker owned by Zhu made a profit of 358 million yuan (HK$449 million) last year. And guess what, 80 per cent of its products were sold to Huiyuan.
The puree maker's astounding success came to light as Huiyuan proposed to buy the company from Zhu for HK$4.9 billion. The reason cited for the planned acquisition: it will boost Huiyuan's earnings per share by 7.7 times because of "significant cost savings".
The Hong Kong stock exchange, incidentally, allowed Huiyuan to list with a heavy dose of connected transactions. All subsequent raw material contracts over the years have been duly approved by independent directors.
Let us return to the acquisition. First, why is Zhu selling? Improving Huiyuan's profitability is not the real reason. Zhu has actually no choice. Under a three-year agreement with Huiyuan's second-largest shareholder, he has to sell Huiyuan the puree maker or spend a fortune buying the No 2 shareholder's 23 per cent stake in Huiyuan. The deadline is July.
Second, what is he getting out of it? According to the announcement, the company is to issue HK$3.4 billion of new shares and convertible bonds to Zhu. It will also take over HK$1.5 billion of the puree maker's liabilities.