Last September, Coca Cola agreed to acquire Huiyuan Juice as it moved to buy its way into fruit-juice businesses in various global markets. Both companies settled the agreement about acquisition and sent the application to the Ministry of Commerce (MOC) for examination and approval. At that time no one expected that this bid could be the first one blocked by the Anti-monopoly Law in China.

China’s government rejected Coca Cola Co.’s $2.4 billion bid to acquire one of China’s largest juice makers, saying the deal - which would have been the largest-ever foreign takeover of a Chinese company - would unduly restrict competition.

The decision, announced on March 18 by the MOC, was the first major test of the country’s strengthened antimonopoly law and could have a chilling effect on merger and acquisition activity in China, as well as on foreign investment in the country generally. It could also complicate efforts by China’s own companies to make overseas acquisitions.

In a statement released on March 18 afternoon in Beijing, the MOC said that if Coca Cola were allowed to acquire the juice maker, China Huiyuan Juice Group Ltd., the combined company’s market power could “squeeze out” smaller players in China’s domestic beverage industry and lead to “higher prices” for consumers.

Huiyuan is China’s largest juice maker. Its share of China’s pure-juice sector, in terms of sales value, was 32.6% of that market by the end of the year, according to market research firm Euromonitor, a lower share compared with 44% at the end of June.

“We have judged from every aspect and had bad feeling for this bid. Actually, Huiyuan has prepared for the rejection of the acquisition bid early in January,” said an anonymous insider.

Coca Cola and Huiyuan: Respect the Government’s Decision

Huiyuan, as the No.1 juice maker in China, has been paid a lot of attention since it was said to be acquired by Coca Cola. On September 4, 2008, not long after the coming out of the acquisition, there was an online survey and over forty thousand people took part in. The result showed that 82.3% of the attendees were against this acquisition bid. The antagonists include not only the ordinary people but also some China’s domestic juice makers which planned to appeal to the MOC and required to bid for Huiyuan openly.

According to the source knowing Huiyuan well, Huiyuan’s top management spent the whole afternoon in the conference room on March 18 because of the abrupt announcement made by the MOC to talk about how to deal with this emergent case. “The telephones of Huiyuan’s public affairs department never stopped ringing,” said the source.

On that night, Huiyuan made an announcement, saying: “Huiyuan Group respects the MOC’s decision on the Coca Cola’s offer notification of acquiring Huiyuan Juice. Now the group’s production and operation are OK and unaffected. We are still focusing on providing the consumers with the good-quality, safe, nutritious and healthy products. We also hope everybody can keep on supporting and caring Huiyuan.”

Later, Coca Cola published its announcement that “no more acquisitions of Huiyuan Juice will happen”. “We feel pity that this bid can not go on as expected. However, we still respect the chinese government’s decision,” Mr. Muhtar Kent, President and CEO of Coca Cola said. “We have already tried our best to provide all the materials relevant to this bid during the examination and approval process in order to make sure the MOC of China can know clearly about it. We always have the hope of promoting the development of Huiyuan Juice together with the elites in Huiyuan Group.”

Mr. Muhtar Kent especially emphasized that the Coca Cola would still be committed to China’s beverage market though the bid was denied. The company will still keep strong confidence in China’s beverage market and won’t reduce its investment.

MOC: Why We Deny It?

Though Zhu Xinli, Board Chairman of Huiyuan Group had the willing to sell Huiyuan which he brought up like his son and Coca Cola had the willing to buy it. This was a deal with mutual consents. However, the MOC didn’t say yes to this “self-willing marriage”.

In the announcement made by the MOC, if the deal were done, Coca Cola could make use of its dominant place in the carbonated soft drink market to sell the juice drinks in the way of bundle sale and tied sale; or, it would set some exclusive trade conditions which might restrict the competition in the juice beverage market and force the consumers to accept the products with higher prices but fewer categories. Meanwhile, the already-existing brands will set limitations on the new brands to enter the market. The potential competition can’t get rid of the effect of the limitations. This can restrict the space for the small- and medium-sized juice makers to survive and develop and brings negative influences on the competition situation of China’s juice beverage market.

The MOC said in the announcement that it made the decision from several aspects according to the Anti-monopoly Law, including: market share, control and concentration, as well as the influence from the market concentration on the market access, technological development, consumers, the juice distributors and the competition in the juice market. The entire process of examination strictly followed the stipulations of relevant laws and regulations and during the process the MOC asked for the opinions of the experts.

The MOC said that it had attempted to negotiate with Coca Cola for a more limited deal that would mitigate what it considered the anti-competitive effects of the acquisition. But the MOC said that Coca Cola’s response didn’t go far enough to address its concerns. The MOC didn’t elaborate on what types of restrictions it had sought.

In the announcement the MOC said that the goal of doing anti-monopoly survey was to protect the fair market competition, consumers’ benefits and social public benefits. Since the Anti-monopoly Law took effect on August 1, 2008, the MOC has already received 40 notifications of concentration of undertakings and has examined 29 of them in accordance with the law. 24 cases have been finished, of which 23 were approved without conditions. One case had concentrations which may result in the exclusion and restriction in the competition. The MOC held a negotiation with the notification maker and then the notification maker gave out the solutions of getting rid of the limitations on competition and made the promise. After the examination of the solutions, the MOC approved this notification.

Antagonists and Protagonists

“The MOC denied the acquisition, which was of good value for Coca Cola,” said Ma Yong, the Secretary-general of China Food Industry Association (CFIA) when he was making a business travel. During the process of the MOC’s examination on the Coca Cola-Huiyuan bid, the CFIA submitted its report to the MOC. “We advocated this acquisition bid,” said Ma Yong.

In Ma Yong’s opinion, in September 2008 the financial crisis has not exerted its influence on the real industries. At that time Coca Cola bid a high price for acquiring Huiyuan Juice, which was a good deal for Huiyuan. “We can see that Coca Cola regretted having bidden such a high price as time went by.”

Previously there was a report quoting a source knowing Coca Cola well. It said that Coca Cola did not fall over itself in this acquisition like before because of the abrupt changes of the market situation. On February 28, 2009, when attending a forum Zhu Xinli once said: “Due to the influence of the financial crisis, there are more and more antagonists in the board of Coca Cola and I have to encourage Mr. Muhtar Kent to make this deal.” However, Huiyuan Group issued an announcement two days later, saying that Huiyuan Group didn’t know any ideas of Coca Cola on this acquisition and the company didn’t receive any suggestions about changing the acquisition plan.

“Though Coca Cola had regretted about it, they could not change the agreement since it was done. Nevertheless, the MOC did a favor for Coca Cola,” said Ma Yong.

For the variety of dissenting opinions against this acquisition, Ma Yong thought that the domestic-funded and foreign-funded companies should enjoy the same treatment in China under the framework convention of the WTO. “If Coca Cola acquired Huiyuan successfully, it would still pay the tax of Huiyuan’s sales income to China’s government; it would still hire Chinese people and would still purchase the fruits in China. Is there a problem? Besides, the foreign capital plays an important role in today’s Huiyuan. It can not be said to a complete China’s national brand,” said Ma Yong. He didn’t believe that the acquisition of Huiyuan by Coca Cola can bring disastrous influence upon China’s beverage market.

In comparison, the Beijing-based H&J Vanguard Co., Ltd, which is a firm antagonist of this deal, said that it “welcomed the decision of the MOC” when acquiring the rejection of this bid. Huang Yiding, a director of H&J Vanguard Co., Ltd, said that the MOC’s decision gave out a positive signal of protecting national brands. The famous national brands like Huiyuan should be included into the scope of national economic safety management. He also said: “during the period of financial crisis, we must put our fate into our own hands and take some measures to promote the whole industry chain to transfer to the high end and to boost the industrial structure shift. We should not give our own national brands to the foreigner.” This company once sent a letter to Chen Deming, Minister of Commerce, stating the reasons of antagonizing the Coca Cola-Huiyuan bid.

Another famous juice maker in China said that they had not been given any authorizations to give opinions about this case. However, this company once declared obviously that it did not support this acquisition bid.

Good News and Bad News

“The rejection of this acquisition bid is both good news and bad news,” said Li Zhiqi, President of Beijing CBCT brand marketing institution. Li Zhiqi once provided global marketing consultation service for Pepsi Cola, Huiyuan and Wahaha. He also cared very much about this acquisition deal.

He said: “the rejection of this acquisition was good news for China’s juice beverage industry, especially the small- and medium-sized enterprises in that industry. If the acquisition were approved, it could be a disaster for the small- and medium-sized juice makers in China. The super strength and integration ability of Coca Cola and the fame of Huiyuan Juice will result in unparalleled control power of this industry, squeezing out the living space of those small- and medium-sized enterprises.”

He took China’s daily chemical industry for example. Some famous domestic daily chemical brands were acquired and laid aside. As time went by, all these brands disappeared. Now the daily chemical industry of China is nearly monopolized by the foreign enterprises. There is even no room for the domestic enterprises to live. But he added: “Both the juice beverage industry and the daily chemical industry are all full of competitions. The monopolization of the foreign capital can not damage the national security as some people say and will have no disastrous results.”

Since the juice beverage industry has no concern of the economic arteries and national security, why did the MOC still reject this acquisition bid? One expert once said: “Huiyuan was the No.1 in the juice beverage industry, not in the beverage industry.” In Li Zhiqi’s opinion, the MOC decided to reject this bid in consideration of deeper factors. “If Huiyuan is still controlled by Zhu Xinli, the government can exert influence on some affairs like purchasing the fruits. However, if the Coca Cola takes over Huiyuan, the influence from the government will be rather small. This will bring negative influence upon the fruit farmers’ benefits.”

In his opinion, the rejection of this bid was “undoubtedly bad news” for Coca Cola and Huiyuan. He suspected the reality of the saying that “Coca Cola regretted about the bid”. “The world beverage giant Coca Cola will not care about the benefits or losses in a short time. They focus on the long-term strategic planning. If acquisition of Huiyuan Juice went on successfully, it would be a great help for Coca Cola to integrate China’s beverage market and would permanently change the competition situation with Pepsi Cola and the other competitors. The benefit would be unlimited.”

Li Zhiqi also formed a conjecture on why Zhu Xinli wanted to sell Huiyuan. In his opinion, though Huiyuan Group has cooperated with Groupe Danone and Warburg Pincus, its middle-term business performance in 2008 showed that the sales amount and gross profit both saw obvious year-on-year decrease. In recent years Huiyuan Group put a lot in planting the fruit trees and the return can only be seen after a long while. The failure of the sale may bring capital stress upon Huiyuan Group.

Some people think that Huiyuan’s market value may depreciate a lot after this case and Zhu Xinli will not plan to sell Huiyuan Juice in quite a while. According to Li Zhiqi, it is quite unlikely for a domestic enterprise to acquire Huiyuna because none of them has enough strength. “However, the sale of Huiyuan has not ended,” said he.

“The rejection of this bid nullified all the efforts Zhu Xinli made before. He has to keep waiting,” said Li Zhiqi.