Stock of the Day
|
Coca-Cola (KO)
Coca-Cola Bid Rejected by Chinese Government
The news was first announced in September 2008 - Coca-Cola was making a bid to purchase a major Chinese juice maker, Huiyuan Juice Group Ltd. The company's bid was about $2.4 billion, a significant premium over Huiyuan's stock price. On the surface, the deal seemed good for both companies; however, yesterday it was announced that Coca-Cola's bid was rejected. What were the reasons for rejection, and why are investors speculating that this might affect other acquisitions as well?
|
| Daily Chart |
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here
|
| Stock Analysis |
Coca-Cola had numerous reasons for going after Huiyuan. Huiyuan had an 8% market share in the Chinese fruit/vegetable juice market, as well as a more than 40% market share in the pure fruit juice market. While Coca-Cola had about 12% of the fruit/vegetable juice market share, they did not hold any market share in the pure fruit juice market, so this would have allowed them to break into that area. The acquisition would have also allowed Coca-Cola to use Huiyuan's well-recognized name, as well as use their local production facilities. Finally, analysts have predicted that the Chinese juice market will continue to expand, an opportunity that Coca-Cola did not want to ignore.
|
A deal at such a premium would often be hard to resist for the target company's shareholders. Many shareholders and employees had seemed excited about the proposed offer. However, in this situation, the decision was not left up to the shareholders, or even to Huiyuan itself. Instead, the decision had to go through China's Ministry of Commerce, and the Ministry ultimately rejected the bid and did not permit Coca-Cola to move forward with the deal. Coca-Cola was required to file for approval, and became the first company to be rejected under China's anti-monopoly law which took effect in mid-2008.
|
The concern around monopolies is not a new idea; just recently, Pfizer (PFE: Charts, News, Offers) and Wyeth (WYE: Charts, News, Offers) had to go through many antitrust regulators in order to get approval for their merger. The question frequently comes up when any two large companies discuss a merger. In this situation, it appears that the Chinese government was concerned that Coca-Cola could end up dominating the fruit juice market in China, if they were to combine their existing market share, Huiyuan's market share, and the Huiyuan brand recognition. There have been reports that the only way the Ministry would have allowed the deal to occur would have been if Coca-Cola agreed not to use the Huiyuan brand name.
|
Had it gone through, this deal would have been the largest foreign takeover of a Chinese company. Many analysts had disagreed on the outcome, some believing that China would block this deal from occurring, with others thinking that China would have no reason to stop the merger. This outcome may cause companies to think twice before proposing a merger with a Chinese company, as this decision subconsciously sets the bar a little higher. For Coca-Cola, they are now unable to pursue Huiyuan any further, so they are left with no choice but to move on. Huiyuan's share prices, which had risen since the proposed deal was announced, have already started to fall again. And every other company which has proposed a merger probably can't help but wonder if the same thing will happen to them as well.
|
Profile |
Click here to view a detailed profile of Coca-Cola.
|
|
|
|
|
