It looked like a corporate marriage made in heaven: A successful Chinese juice maker, having courted many suitors, finally found a willing partner that also happened to be the world’s largest soft drink manufacturer. For the owners of the Chinese company, it would mean a handsome multi-billion yuan dowry; the foreign soft drink maker, meanwhile, would buy its way into a fast-growing and potentially vast market segment that it had so far failed to conquer. It seemed all too good to be true — and so it was.


Huiyuan Juice and Coca-Cola’s dream match, which would have been China’s largest-ever foreign buyout, was terminated by regulators on March 18. After six months’ consideration, officials said the deal would harm competition and consumer choice. Coke president and CEO Muhtar Kent expressed disappointment but respect for the decision in an official statement. Meanwhile, Huiyuan acknowledged a missed opportunity to promote industry expansion.


The reaction in the international press was more strident. “China Raises the Draw Bridge,” pronounced the Wall Street Journal. Coke’s proposed acquisition was a high-profile test for China’s new anti-monopoly law, which was introduced last year. Was the decision evidence that the specter of protectionism had arisen and that the law, as skeptics feared, would be used to pander to nationalist sentiment?


Experts suggest the case is not so cut-and-dried. While some observers believe that the government gave in to protectionist instincts, others disagree, noting that China has become more open to M&A this year. In fact, they say, the decision is an example of growing professionalism on the part of Chinese M&A regulators, setting a useful precedent in interpreting China’s new anti-monopoly law.


The Coke-Huiyuan Story


Zhu Xinli, Huiyuan’s founder and president, is perhaps the biggest loser from the affair. Zhu owns 42% of the company, and stood to make 7.4 billion Hong Kong dollars. He has taken Huiyuan from being a local Shandong concern to a new base in Beijing, and onto the Hong Kong stock exchange in 2007. Huiyuan now controls over 10% of the fruit and vegetable juice market, and 40% of the pure juice sector.


The Chinese entrepreneur has managed his company with the objective of selling it, comparing Huiyuan to a girl raised to be married off. “Too early is not mature enough,” he once said of his progeny. “Too late, and she is too old. Choosing the right time to join forces is most important for Huiyuan.” In the past, Huiyuan has struck up relationships of varying lengths with other companies, including Delong, Tong Yi and French Danone Group, which owns 21% of the company.


But for Zhu, the Coke deal was “the one that got away.” If approved, his plan was to concentrate on upstream activities such as the fruit plantations and package box manufacturing that are Huiyuan’s crown jewels. (Only the listed Huiyuan Juice was for sale: the orchard farms, fruit processing and other upstream business units were not part of the deal.)


Stocks in Huiyuan dropped 40% the day after the decision was announced, but even before that there were signs of trouble. Some observers think Huiyuan’s focus on expanding capacity was a strategic error: Profit margins shrank in the first half of 2008 (though profits grew 7.1% over the whole year). While Huiyuan blamed this on inflation in raw materials in the first half of 2008, ineffective marketing and a stagnant product range may have taken their toll, as the 21st Century Business Herald has reported. Luo Lei, of Guo Tai Jun An Securities, told Caijing Magazine that the company’s marketing skills are “not so excellent.” Partly, the sale to Coke appears to have been designed to correct this.


Second Thoughts


From Coca-Cola’s perspective, buying Huiyuan was a chance to penetrate China’s seductive fruit and vegetable juice segment, in keeping with its global strategy of diversifying beyond its traditional carbonated drinks stronghold. China’s fruit and vegetable juice market grew at a tempting 15% rate last year to US$2 billion, even as global demand for carbonated drinks fell. Coke already claims over half of China’s soft drink market, and around a 10% share in the fruit and vegetable juice market, but has yet to make inroads selling pure juice.


While the UD$2.4 billion bid for Huiyuan may have made sense at the time, that price now looks steep in light of the current global financial crisis. Coke board members’ opposition has reportedly mounted. Despite a show to the contrary, for Coke, the dominant emotion triggered by Beijing’s decision to reject its bid may have been relief.


What caused China’s Ministry of Commerce (MOFCOM) to let the foreign giant off the hook at the expense of a prominent Chinese entrepreneur? The regulators justified their decision on the grounds that the buyout would have an unfavorable effect on competition. “The concentration would have narrowed the room for the survival of medium and small-sized domestic juice firms, creating an unhealthy impact on the competitive structure of China’s juice beverage market,” MOFCOM said. Consumers could have faced higher prices and lower choice as a result.


Following the decision, Reuters reported that “the ruling fanned concern among industry analysts and trade lawyers that China would use its anti-monopoly law to fend off foreign attempts to buy promising domestic firms, even when the resulting market concentration would not be excessive.” From the beginning, the deal had been plagued by objections couched in nationalist rhetoric, and a poll by found that over two-thirds of the 120,000 respondents disapproved of foreign investments in Chinese companies. Eighty percent supported MOFCOM’s rejection of the bid.


Storm in a Coke Can?


As the dust has settled, however, other perspectives have emerged. Questioned about the canceled deal by foreign correspondents during a recent visit to Beijing, OECD secretary general Angel Gurria recalled the story of how France blocked a bid by Pepsico for food giant Danone, because government officials had labeled the yoghurt industry as “strategic.” Others have made the point that protectionism occurs routinely in many Western countries. If the Huiyuan-Coke ruling was influenced by protectionism, they imply, it is nothing to get especially excited about.


As in other jurisdictions, standards of antitrust and competition law are often subjective, and China’s new anti-competition legislation also leaves ample room for interpretation, points out Gong Lefan, a partner at Zhong Lun Law Firm. In China, as in other countries, this means that the final decision could be influenced by public opinion, which can in turn be driven behind the scenes by opponents of the deal, he says. “If the parties involved in the deal can’t do a good job of managing public perceptions, the odds of obtaining a favorable result may likely be stacked against you,” says Gong. “In reality, I cannot imagine a government authority can just go ahead without taking public opinion into consideration.” It is not surprising that competitors would use all available methods and resources, be it politicizing the nationalist sentiment, or lobbying with government authorities, to torpedo a deal that might pose a threat to their very own survival, he points out.


To get a deal approved, it is not therefore simply a question of satisfying regulators’ requirements. Parties need to manage their public image, says Gong. Neither company took the fight to their opponents on the Internet, Gong notes. “Fighting public opinion could be an uphill battle. So the executives running the deal must know how to manage public reactions way before the information about the deal becomes public,” he says.


Gong says that the letter of the law leaves enough leeway for the government to decide in favor or against a given deal. In fact, many experts believe the logic behind the government’s ruling was well grounded. Gurria himself explicitly attributed China’s decision to the same kinds of concerns over encouraging competition and consumer choice that weigh on regulators elsewhere.


One bone of contention has been how far the carbonated drinks market, in which Coke reigns supreme in China, and the market for pure juice, are interconnected. “Carbonated beverages and juices do not seem to belong to the same segment of the beverage market, so the prediction that dominance in one market will cause dominance in the other doesn’t seem to be very well-founded,” Sheng Jiemin, a Peking University law professor, told the Financial Times.


However, Alex Xu, an M&A expert and vice president at ChinaVest, disagrees. Sometimes, purchasing decisions in the two segments may overlap, he says. Moreover, he adds, it is highly possible that if MOFCOM approved this deal, Coca-Cola would leverage its strength in carbonated drinks to persuade its dealers to sell Huiyuan fruit juices, putting “tremendous pressure” on competitors.


“There could really be competition issues there,” Eduardo Morcillo, an M&A expert at InterChina Consulting, says. “Coca-Cola could really have a position of power in the market that could be unfair. China is just implementing the competition law, and it needs to create a playing field for this law to be respected.”


In this light, the decision may even mean that China’s regulators are raising their game. Kang Rongping, a researcher at the Chinese Academy of Social Sciences, a government think tank, was surprised the deal was rejected given the small size of the pure juice market, and he was encouraged by the seriousness with which regulators appear to have treated the case. He views it as a useful benchmark for future anti-monopoly rulings.


InterChina’s Morcillo says that, far from protectionism being on the rise in China, the opposite is true at the moment. Over the past three years, barriers to foreign investment have indeed been raised in areas where foreign capital or technology are no longer deemed necessary. But this year, Morcillo has witnessed a change in local government attitudes. Even in industries far more closely protected than the fruit juice sector, such as steel, deals are now possible that were not last year, or perhaps even three years ago, he said at a Cheung Kong Graduate School of Business event in Beijing.


Extracting Conclusions


Following the negative reactions to the initial announcement, China’s Commerce Minister Chen Deming was quick to stress that China remains open to foreign investment: Of 40 anti-trust filings made since the new monopoly law took effect, the Coke deal is the sole rejection to date. But the damage to China’s image may already have been done, and could harm Chinese firms’ push to reap rich foreign M&A pickings in the wake of the financial crisis.


“There was an opportunity there — and it may be a missed opportunity now — for China to send an olive-branch signal to the rest of the world and say, ‘Hey, China’s open for business. If you want to invest here we’re open to that,’” says Bill Russo, a former vice president of Chrysler Northeast Asia, now president at Synergistics, a consultancy. Fruit juice is hardly a strategic interest for China, he points out, but “how is an industry that is strategic to a country going to react to China now wanting to purchase that asset? I think the Coke deal will color opinion.”


Wharton marketing professor John Zhang agrees. “We are already seeing the effect in Australia,” he says. Australia’s Foreign Investment Review Board is pondering a number of proposed investments by Chinese state-owned businesses, including the controversial $19.5 billion investment by Chinalco in Rio Tinto, the world’s third-largest mining company. A decision on the case was postponed a further 90 days on March 16. Opponents in Australia argue that the country should mirror China’s ruling in the Coke bid.


All this lends urgency to the areas in which even sympathetic foreign observers complain China needs to pull up its socks: the length of the process (six months); the lack of transparency with which the decision was made (scant details of the underlying analysis were given); and the poor communication of the ruling (in a one page document) could all have been better handled, they say. China’s regulators would seem to be well advised to brush up on their softer skills to mitigate potential negative repercussions in similar cases in the future.


There may also be lessons to learn for Coke and foreign corporations. For one thing, trying to gain absolute control of a big Chinese company, even in non-strategic industries, may not be very wise. ChinaVest’s Xu says that foreign parties often enter deals with the goal of holding majority stakes, but then realize the difficulties and alter their expectations. He cautions against 100% takeovers of the type planned by Coke. “One hundred percent gets too much attention.”


Coke has suffered before when trying to buy companies outright in other jurisdictions, Xu points out. In October 2003, the Australian Competition and Consumer Commission made a decision comparable to MOFCOM’s, denying Coca-Cola Amatil the right to buy Berri Limited, whose core business was fruit juice and fruit drinks. Xu contrasts this with the approach of YUM! Brands, owner of KFC, Pizza Hut and other restaurant chains, which recently made what looks like a smart move in buying 20% of Little Sheep (a Chinese chain restaurant).

Now that the Huiyuan deal is dead, Coke has sworn to focus its energies on extending the reach of its existing brands in China, but also coming up with new ones, including in the juice sector. “The Chinese juice market has vast potential and more and more people will drink natural juices whenever their income allows,” says Wharton’s Zhang. “It is hard to imagine that Coke will give up on that market because of the setback.” This could spell trouble for Huiyuan. Moreover, Huiyuan would like to move into diluted fruit juices, but this is precisely where Coke seems best equipped to compete. Coke has many options left, Zhang says: “It can go it alone, or acquire a smaller Chinese manufacturer, or become a minority owner of some existing juice companies.” And Huiyuan now needs to look for alternative solutions to correct its marketing inadequacies.

Looking on the bright side, at least the deal has revealed to Huiyuan Coke’s strategic intentions in China, says Zhang. Still, Zhu Xinli has every reason to feel disappointed by the failure to close the deal, Zhang adds. “The company has lost a huge amount of shareholder value; he has to re-think his strategic orientation; he needs to get ready for market entry from not just Coke but also other beverage competitors – foreign or domestic, now that everyone knows that Coke is high on this market – and he has to bec