China Huiyuan Juice: Coca-Cola’s bid may be subject to approval by State Council

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Coca-Cola’s bid for China Huiyuan Juice may be subject to approval by China’s State Council as a pre-condition to the Ministry of Commerce [MOC] granting its approval, an MOC official and an antitrust expert told dealReporter

So far the MOC hasn’t found any problems in its competition analysis, an MOC official who is not directly involved in the review but closely following the deal said. No one at the MOC is willing to take responsibility to sign off on the deal for fear that there may be a nationalist backlash after it issues an approval, the official said, adding that eventually only the State Council can decide whether to have the transaction go through.

The MOC is now awaiting direction from the State Council before it makes a final recommendation, the official said. Although Vice Premier Wang Qishan is in charge of supervising the MOC at the State Council, the final decision maker could turn out to be Premier Wen Jiabao, the official added

Ever since the arrest of former senior MOC official Guo Jingyi last year for accepting bribes, the MOC has been under increasing pressure to exercise caution in approving large inbound deals, the official noted.

“In past years, many inbound deals could not get through without Guo’s push,” the official explained. “Now, even if the Coca-Cola/Huiyuan deal gets approval as it measures up to all the laws and regulations, people would still think there could have been some corruption involved during the review process. That’s why the MOC is extremely cautious in giving green light to the deal.”

After the Guo incident, a couple of other officials at the MOC and other regulatory bodies, including the State Administration for Industry and Commerce [SAIC] and the State Administration of Foreign Exchange [SAFE], had been arrested for corruption, relating to approvals given for inbound deals.

The antitrust regulator has encountered similar heavy pressure during its reviews of other inbound transactions, such as Johnson & Johnson’s bid for Dabao, the Chinese cosmetics company, the official said. Since this deal was eventually cleared by the MOC, the official speculated that the same would happen with Coca-Cola’s bid for Huiyuan, though it would probably take some time in order to ease media pressure.

“If the deal is killed, the excuse will most likely be to protect a Chinese famous brand and Chinese national industries.”

According to a Beijing-based antitrust expert who claimed to be familiar with the MOC, “It is really hard to predict if the deal would get through now and even harder to say if the deal would have any breakthroughs before the Long Stop Date, 23 March 2009.”

An MOC spokesperson previously confirmed that the review of the transaction had entered the 90-day Phase II review period on 15 January 2009.

The expert referred to comments made by Lin Zheying, the vice director of the Department of Foreign Investment Administration at the MOC, who recently said at a conference that Coca-Cola’s bid could encounter difficulties due to excessive media coverage, Huiyuan’s status as a well-known domestic brand and the deal’s potential impact on China’s juice industry.

“Lin’s comments on the deal are definitely a negative signal,” the expert said, adding that his observations showed that industrial policy and famous brands protection among the considerations in the antitrust review. However, he noted that the factors being taken into consideration revolve more around foreign capital investment regulation than anti-monopoly concerns. As the review process has already entered the Phase II period, Lin’s comments show that the deal is facing some uncertainties, the expert added.

“I’m not sure if Lin gave the comments on behalf of the MOC or on his own behalf, but it did show that deal will be influenced by subjective factors during the anti-trust review.”

“Officials involved in inbound reviews at the MOC are feeling extreme pressure now due to the investigation on Guo Jingyi. And Lin’s comment not only relieved such feelings but were also aimed to win the understanding of the public,” the MOC official explained.

A source close to Coca-Cola said that the information presented by Lin was nothing new, since it is the MOC’s job to assess the transaction’s impact on consumers and the beverage industry. In addition, the source noted that Huiyuan’s status as a famous brand has remained the same since the bid was announced. “It’s the nature of the brand.”

However, reasons to explain the comments about media reports potentially interfering with the administrative decision-making process eluded the source. “With the dairy incident and the credit markets tumbling, there hasn’t been a whole lot of coverage on the deal lately,” the source pointed out.

Shares of Huiyuan fell nearly 16% after the comments by Lin were made, though they were up about 7% to HKD 9.04 on Friday afternoon.

The source close to Coca-Cola was unaware of any recent changes with the transaction. “Fundamentally, between a week ago and today, nothing has changed.”

The recent drop in Huiyuan’s share price could perhaps be explained by recent stock market trends, the source speculated, adding that it may simply be hedge funds behind the recent volatility.

Hong Kong’s key Hang Seng Index fell 310.91 points, or 2.3%, to 13,228.3. The index has lost 540.76 points since the start of the week.

The source brushed off any concern that the necessary preconditions would not be fulfilled by the 23 March Long Stop Date, since Huiyuan and Coca-Cola still have the option to agree to extend the date. “Both parties have to agree,” the source said. Since there is still about five weeks left, the source noted that there was still “some time” left for the MOC to complete its review.

“Coca-Cola is working hard to get the deal done,” the source said, in response to market speculation that the beverage behemoth could pull out of the deal or ask for a price re-cut. Since this transaction would mark Coca-Cola’s biggest international deal and second largest deal ever, after its USD 4.1bn acquisition of Whitestone, New York-based Glaceau in 2007, maker of Vitaminwater, Coca-Cola remained committed to seeing the deal through, according to the source.

Meanwhile, a source close to Huiyuan’s competitors refused to consider Lin’s recent comments as a negative signal. Lin’s comments were just a smoke ball sent out to test the public’s views, the source speculated. “To my understanding, the deal could actually have a positive breakthrough shortly.” The deal also has not faced any resistance from local governments. Coupled with this, opposition on internet message boards has begun to get weaker and weaker in recent weeks.

Since last year Chinese decision makers have begun to attach importance to media feedback, especially those made via the internet, a source close to a national security organization said. Such organizations are in charge of collecting media views and reporting them to decision makers.

Media feedback will also be channeled to decision makers in regard to Coca-Cola’s bid for Huiyuan, the source said.

The source close to Huiyuan’s competitors told this news service that he was approached by the national security guys and asked to comment the Huiyuan deal.

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