On March 18, the Ministry of Commerce made a ruling on the anti-monopoly review of Coca-Cola's acquisition of China's Huiyuan Company. According to Article 28 of the Anti-Monopoly Law, it decided to prohibit this "concentration."
This is also the first merger case not approved since the implementation of the Anti-Monopoly Law on August 1, 2008.
From September 2008 when Coca-Cola announced its intention to acquire Huiyuan, throughout the entire anti-monopoly review process, issues such as the survival of national brands, the reaction of domestic beverage companies, and the determination of "monopoly standards" have been intertwined. Moreover, the deterioration of the global economic environment has also impacted both parties involved in the transaction.
Now that the merger has been rejected, Coca-Cola can smoothly withdraw, while Huiyuan must face the result of being unable to be acquired.
"Unexpected" Rejection?
According to the Ministry of Commerce, on September 18, 2008, it received antitrust notification materials for Coca-Cola's acquisition of China Huiyuan Company. After supplementation by the notifying party, the notification materials met the requirements stipulated in Article 23 of the Anti-Monopoly Law. On November 20, the Ministry of Commerce initiated an investigation into this concentration, and on December 20, it decided to conduct further reviews based on preliminary reviews.
During this period, the Antitrust Bureau once considered Coca-Cola's notification materials to be non-compliant. In September and October 2008, Coca-Cola submitted supplementary materials again and completed the last round of supplements on November 19.
After reviewing, the Ministry of Commerce determined that after the completion of the concentration, Coca-Cola could use its dominant position in the carbonated soft drink market to bundle the sale of fruit drinks or set other exclusive trading conditions. The concentration would restrict competition in the fruit drink market, forcing consumers to accept higher prices and fewer varieties of products; at the same time, due to the limiting effect of existing brands on market entry, potential competition would not eliminate these anti-competitive effects; additionally, the concentration would squeeze the survival space for domestic small and medium-sized juice enterprises, adversely affecting the competitive landscape of China's juice beverage market.
This outcome might come as a surprise to Coca-Cola. Reports indicate that after the Ministry of Commerce announced the news, senior executives from Coca-Cola and Huiyuan were discussing countermeasures and the upcoming statement in Beijing.
On March 6, prior to this announcement, Coca-Cola Global President Mu Taikang appeared in Shanghai during the establishment of Coca-Cola's R&D center in China and announced a high-profile plan to invest $2 billion in China over the next three years. This move was then seen as Coca-Cola's way of showing goodwill to the Chinese government to gain approval for the acquisition.
However, from another perspective, this outcome was not unexpected. From the moment Coca-Cola announced its intention to acquire Huiyuan, the plan drew numerous objections.
On September 8, 2008, four senior executives from Junsheng Consulting and Qianshou Juice discussed in Beijing the principle of "jointly opposing Coca-Cola's acquisition of Huiyuan." Subsequently, Junsheng Consulting announced that it had organized several domestic juice companies to jointly petition the Ministry of Commerce within 30 days, requesting that the Ministry convene a hearing on this acquisition. However, this plan ultimately came to nothing.
On December 26, the Ministry of Commerce held an industry hearing regarding this acquisition, inviting entities such as Shunxin Agriculture (000860.SZ), Huabang, Nongfu Spring, and the China Beverage Industry Association. At that time, insiders believed that the possibility of approval was still significant.
But our reporter learned that during the 2009 National People's Congress and Chinese People's Political Consultative Conference sessions, Junsheng Consulting had commissioned Li Deshui, a member of the National Committee of the CPPCC and former director of the National Bureau of Statistics, to submit a letter opposing the acquisition to the Ministry of Commerce. In the 2006 NPC session, Li Deshui had loudly called for resolute prevention of any malicious acquisitions aimed at monopolizing the Chinese market, drawing significant attention.
Mei Xinyu also told reporters that he himself had received numerous objections from inside and outside the industry. "Restrictive Conditions" Debate
"The market shares of both sides are so high, it's impossible to get approval, this is originally a foregone conclusion, but many factors have complicated it," Mei Xinyu said. He believes that the decision of the Ministry of Commerce indicates that the review department truly handled this approval from a legal perspective, demonstrating the seriousness of the law.
But as a globally renowned multinational beverage giant, Coca-Cola certainly would not fight an unprepared battle.
In late September 2008, Li Xiaoyun, vice president of Coca-Cola (China) Beverage Co., Ltd., told our reporter in a special interview that making such a large investment decision to acquire Huiyuan did not happen within one or two months. During the acquisition process, Coca-Cola conducted extensive research, including on the acquirer's situation and financial operations. Coca-Cola also specifically hired a Canadian market research company to conduct a survey, which showed that the combined market share of the two companies in China's fruit drink market did not exceed 20%.
However, a person from a domestic beverage enterprise privately told the reporter that in their view, after the merger of Coca-Cola and Huiyuan, their market share in the fruit drink market would exceed 50%.
On March 18, the Ministry of Commerce also revealed that during the review process, in order to reduce the adverse impact of the concentration on competition, it had negotiated with Coca-Cola regarding restrictive conditions, requiring the notifying party to propose feasible solutions. Coca-Cola later proposed preliminary solutions and revised plans. However, after evaluation, the revised plan still failed to meet the requirements of the Ministry of Commerce.
Foreign media quoted informed sources as saying that one of the "restrictive conditions" previously proposed by the Antitrust Bureau was for Coca-Cola to abandon the Huiyuan brand.
Li Su, president of Junsheng Consulting, said that last year, Junsheng Consulting had called for submitting three alternative plans to the Ministry of Commerce, one of which was if Coca-Cola insisted on acquiring Huiyuan, then in the acquisition, additional conditions should be attached to Huiyuan's juice, meaning separating the brand from the assets. Therefore, he believed that the possibility of the Ministry of Commerce proposing this condition was extremely high.
In his view, this could directly reveal whether Coca-Cola was acquiring the brand to destroy competitors or placing more emphasis on Huiyuan's channels, production, and R&D capabilities.
A person close to Zhu Xinli within the Huiyuan Group speculated that the rejection of the acquisition might be related to the support Huiyuan received from multiple local governments during its growth.
The person said that local governments provided extremely favorable land and factory prices, even giving them away for free, to attract investment and support the development of national brands. This acquisition involved these assets, and if successful, it would be equivalent to Huiyuan monetizing the policy preferences granted by the state and local governments. On the other hand, there was also the issue of state-owned asset loss, which might be another major factor for the Ministry of Commerce rejecting this acquisition case besides the adverse impact on competition.
Coca-Cola's "Ordinary Heart"
Li Su believed that the rejection of the acquisition case by the Ministry of Commerce gave Coca-Cola a "perfect ending." In his view, given the current economic situation and stock price, acquiring Huiyuan at this time was not beneficial for Coca-Cola, "they themselves didn't want to do it anymore." Such views were also agreed upon by another industry insider.
The worsening global economic situation reduced the value of this acquisition case.
In February 2009, a Beijing-based research institution published an analysis report pointing out that under the current circumstances, there was a 90% chance of uncertainty regarding Coca-Cola's acquisition of Huiyuan. From the transaction price, the acquisition price proposed by Coca-Cola in September last year was HK$12.2 per share, equivalent to a P/E ratio of 50. Later, as the financial crisis deepened, Huiyuan's stock price fell below the HK$9 level, and Coca-Cola's market value in the United States continued to shrink.
On September 3, 2008, the day the acquisition of Huiyuan was announced, Coca-Cola's stock price was still at US$16.96 per share, rising to US$18.23 per share on September 15. But after October 2008, its stock price began to continuously fall, closing at US$11.87 per share on March 17, 2009.
On February 28, Zhu Xinli, chairman of Huiyuan Group, stated at the 2009 Multinational Company Forum that opposition voices within Coca-Cola's board regarding the acquisition of Huiyuan were increasing under the current global crisis situation.
Previously, Li Xiaoyun had also told this reporter that Coca-Cola had actually prepared for two scenarios regarding the approval of the acquisition. If it wasn't approved, they had another development plan. However, she did not disclose the details of the plan.
She said that Coca-Cola maintained an "ordinary heart" towards the approval, and acquiring Huiyuan was absolutely not an indication that they intended to focus their future development on the juice sector. Currently, Coca-Cola's carbonated beverages maintain double-digit annual growth, and their tea beverages and bottled water businesses are also growing well. Meanwhile, Coca-Cola's own fruit drinks will continue to develop.
On March 18, Coca-Cola clearly announced that it would "not continue with the acquisition of Huiyuan Juice."
Huiyuan Caught Off Guard
The rejection of the acquisition may have a greater impact on Huiyuan. After the acquisition case was cut short, Huiyuan will need to formulate new strategies to deal with this change.
Previously, after announcing the selling plan, Zhu Xinli expressed that he would focus on upstream orchard construction and immediately started related work. He frankly admitted that if the acquisition was not approved, he would have to devote 80% of his time and energy back to the listed company, which attracted too much attention. For example, sales targets and profit objectives all needed to be explained to shareholders.
Huiyuan Juice's 2008 interim report showed that the company's gross profit was only 391.5 million yuan, significantly down by 22% compared to 503.3 million yuan in the same period last year; the diluted earnings per share were only 0.07 yuan, a decrease of 72% compared to 0.25 yuan in 2007.
Moreover, according to an informed source, in preparation for Coca-Cola's acquisition, Huiyuan lost some technical backbone staff, and some customers adopted a wait-and-see attitude, or simply stopped operating Huiyuan products. "After the acquisition was rejected, Huiyuan may need to restart recruitment and related work."
Asiatrader.com Hong Kong analyst Wang Jue said that when the market heard about the acquisition of Huiyuan by Coca-Cola, Huiyuan's stock price jumped from over HK$4 directly to above HK$10, indicating that the acquisition news generated a significant premium. Once the acquisition bubble bursts, Huiyuan's stock price will suffer a heavy blow. And on March 18 (before the suspension at 10:20 AM), Huiyuan's stock price plummeted by 19.42%, falling to HK$8.3.
This is also the reason why Zhu Xinli was eager to push forward the acquisition. When revealing opposition voices from Coca-Cola's board, Zhu Xinli also said that he would meet with Mu Taikang to "give him some encouragement."
According to Article 53 of the Anti-Monopoly Law, if dissatisfied with the decisions made by the anti-monopoly enforcement agency under Articles 28 and 29 of this Law, one may first apply for administrative reconsideration in accordance with the law; if dissatisfied with the decision of administrative reconsideration, one may initiate administrative litigation in accordance with the law.