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UPDATED: September 22, 2008 No.39 SEP.25, 2008
Coke's Juicy Deal
Coca-Cola has to handle its antitrust filing with prudence for a smooth purchase of China's top juice maker

HEFTY PRICE: Coca-Cola has offered to purchase Huiyuan Juice Group, whose headquarters are pictured above, for $2.4 billion. The deal is subject to the approval of Chinese regulators

Huiyuan posted net profit of 367.3 million yuan ($54 million) in the first half of the year, an increase of only 7.2 percent. In 2007, the company's net profit nearly tripled. But this year has come under pressure from mounting raw material costs due to severe winter snowstorms and the May earthquake as well as soaring distribution network maintenance fees. As a result, it laid off 2,592 employees in the first half of this year, of which 1,406 were salespeople.

Both Coca-Cola and Huiyuan anticipate that the deal would create synergies between Huiyuan's production capabilities and Coca-Cola's distribution and raw material purchasing capabilities, leading to operational and cost efficiencies. The Chinese firm is expanding its production capabilities to tap the country's fast-growing juice market.


The $2.4-billion deal would be the largest foreign takeover of a local firm in China and the second largest acquisition in Coca-Cola's history, next to its purchase of specialist water and energy drinks maker Energy Brands, Inc., known as Glaceau, for $4.1 billion last year.

The acquisition is subject to anti-monopoly review in China, because the combined global turnover of the two companies was more than 10 billion yuan ($1.5 billion) last year, and they each had revenue of more than 400 million yuan ($59 million) in China in 2007.

Yao Shenhong, the Ministry of Commerce spokesman, told Xinhua News Agency earlier this month that the ministry would review the deal and it was "against monopolies while supporting normal economic activities."

Local beverage companies are worried that if the deal goes through, it would give Coca-Cola more than 60 percent of China's domestic juice market via Huiyuan's established sales and distribution networks.

According to a Beijing Morning Post report, the Ministry of Commerce soon will hold a hearing on Coke's bid for Huiyuan, during which domestic juice producers will jointly submit their three alternative plans for Huiyuan. Their first recommendation is for a group of local companies to buy Huiyuan. Another option is to split the brand from Huiyuan's assets, auction the brand to local companies and sell the assets to Coca-Cola. A third option is to establish a Chinese investment fund to make a counter offer for Huiyuan.

The proposed acquisition also sparked a fierce backlash from consumers. Nearly 80 percent of more than 480,000 respondents in an online poll conducted by the Chinese portal Sina.com as of September 17 said they were against the deal. A similar percentage said they believed the deal would devour another national mainstay brand.

Winning approval

Yong Huang, a Beijing-based antitrust expert who works as an arbitrator at the China International Economic and Trade Arbitration Commission, said he does not believe the voices of opposition are loud enough to compel regulators to block the deal. He told the Financial Times that "the opposition could prolong the review, as the Ministry of Commerce is likely to be more cautious and take longer in reviewing such a high-profile case."

According to Article 27 of the Anti-Monopoly Law, the antitrust review will consider six factors, including the market share of both parties in the acquisition in relevant markets, whether competition in the relevant market is sufficient, whether the acquisition will create entry barriers or affect technological advances in the market, and the acquisition's influence on customers and competitors.

Defining a suitable and reasonable relevant market is crucial for Coca-Cola to win approval for the deal, said Zhang Xinzhu, Director of the Research Center for Regulation and Competition at the Chinese Academy of Social Sciences, in an article in the 21st Century Business Herald.

Zhang, who participated in the drafting of the Anti-Monopoly Law, warned against jumping to conclusions about the proposed deal without professional evaluation.

"The antitrust review needs professional judgment," said Zhang, adding that the wide media speculation on both firms' market shares would not help to determine whether the acquisition would eliminate or restrict competition in the relevant market.

"The Ministry of Commerce will have different conclusions if the relevant market is defined as the whole soft drinks market or the pure juice and cola market," she was quoted as saying.

Concern about whether the deal would create a monopoly would be diluted if the acquisition was put into the context of the entire beverage market; otherwise, it could create monopoly concerns, because both companies are major players in their respective niches, Zhang said.

Coca-Cola still had not submitted the antitrust filing for required documents as of September 17.

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