By Jason Simpkins
Managing Editor
Money Morning
Chinese regulators rejected Coca-Cola Co.'s (KO) $2.3 billion bid for China Huiyuan Juice Group Ltd., China's largest juice company. The move surprised many analysts, as it will make it easier for Western countries to prevent Chinese companies from acquiring overseas targets and discourage other large corporations from pursuing mergers in China.
China's Ministry of Commerce blocked the deal saying the biggest takeover of a Chinese company failed to meet the country's anti-monopoly law and would be "negative for competition."
"If the acquisition of Huiyuan went into effect, Coca-Cola is very likely to take a dominating position in the domestic market and the consumers may have to accept the high price fixed by the company as they don't have more choices," the Ministry of Commerce said in a statement.
Huiyuan Juice is a household name in China, and controls 42% of the country's pure-fruit-juice market. Coca-Cola controls 54% of China's soda market.
Coke could challenge the ruling under Article 53 of China's anti-monopoly law, but the company said in a statement that it would not pursue the deal any further.
"We are disappointed, but we also respect the Ministry of Commerce's decision," said Coca-Cola Chief Executive Officer Muhtar Kent.
Coke launched a $2.4 billion bid for Huiyuan Juice last September. At HK$12.20 a share, the deal valued Huiyuan at a 195% premium to its market value prior to the offer. Indeed, the offer was so generous, that some investors thought Coke might actually be overpaying.
Huiyan stock was suspended 13 minutes after trading started on the Hong Kong exchange. The stock plunged a record 19% to HK$8.30 a share during that time.
Implication on China's Overseas Acquisitions
Analysts were surprised that authorities blocked the deal, which had few economic implications and posed absolutely no threat to national security.
"This seems to me to be against China's best interest," Chris Ruffle, Emerging Markets Director at Martin Currie Investment Management Ltd. told Bloomberg. "It plays into the hands of protectionists who will not find it easier to block acquisitions which Chinese companies make overseas."
Aluminum Corp. of China Ltd. (ADR: ACH), also known as Chinalco, is already facing resistance in Australia, where the company is trying to finalize a $19.5 billion tie-up with Rio Tinto PLC (ADR:RTP).
Australia's Foreign Investment Review Board is considering the deal amid political opposition that doesn't want to see key mining assets fall into foreign hands.
Under terms of the agreement, state-owned Chinalco would pay $12.3 billion for a piece of Rio's iron ore, copper and aluminum mining assets, and $7.2 billion for convertible notes that would double its stake in Rio to 18%.
"I think we should be selling the milk, not the cow and in this case, the minerals, not the mine," independent senator Nick Xenophon said Wednesday on Australian radio.
Senator Barnaby Joyce, an Australian politician who took out television ads on Tuesday urging the blockage of the Chinalco deal, Reuters reported.
"The Australian government would never be allowed to buy a mine in China. So why would we allow the Chinese government to buy and control a key strategic asset in our country," the ad said. The ads aired in the capital of Canberra and Joyce's home state of Queensland, where Chinalco will mine new assets.
Chinalco's bid for Rio Tinto is just one of many overseas acquisitions being made by Chinese companies, as the nation scrambles to lock in long-term supplies of resources at low prices.
In February, China Minmetals made a $1.7 billion (A$2.6 billion) bid for OZ Minerals (ASX:OZL), the world's second leading zinc miner. Hunan Valin Iron & Steel Group Co. quickly followed that deal with an agreement to buy $793 million (A$1.2 billion) worth of shares in Fortescue Metals Group Ltd. (ASX:FMG), which has significant iron ore holdings in Australia's western states.
In February, China Minmetals made a $1.7 billion (A$2.6 billion) bid for OZ Minerals Ltd., the world's second leading zinc miner. Hunan Valin Iron & Steel Group Co. quickly followed that deal with an agreement to buy $793 million (A$1.2 billion) worth of shares in Fortescue Metals Group Ltd., which has significant iron ore holdings in Australia's western states.
"I think the Coke decision will backfire on China," an unidentified dealmaker told the Financial Times. "It will embolden nationalists in countries like Australia, who are unhappy with all these resource deals."
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Coke's rejection is to Chinese public's taste