Coca-Cola’s takeover of Huiyuan Juice has been blocked by China’s Ministry of Commerce (Mofcom) in a move that lawyers say is both protectionist and highly damaging to M&A prospects in the country.
The US$2.4 billion deal, which would have been the largest foreign takeover of a Chinese company, was blocked today, in an announcement on Mofcom’s website (Chinese only).
There had been numerous complaints against Coke’s attempted acquisition before Mofcom’s decision. “Whether they had any merit is neither here nor there,” said Martin Huckerby, partner at Mallesons Stephen Jaques in Shanghai. “Mofcom may have been concerned about upsetting the community if it were to approve a contentious deal based on a pure competition analysis.”
This is wrong though, say lawyers. ACCC passed the BHP-Rio Tinto deal before it collapsed, despite huge opposition, while the GE-Honeywell deal was controversially blocked in Europe. But in both cases the outcome was based on a pure competition outlook. Not so in China, it would seem.
Mofcom’s justification appears to revolve around two key factors: firstly that Coke could leverage its market power and take advantage of its dominant position in the soft drinks market. “Presumably Mofcom was concerned about Coca-Cola linking the sale of its Coca-Cola products with the sale of the Huiyuan juice products,” said Huckerby.
His view was backed up by other lawyers. “This whole premise of conglomerates, and how Coke can turn its market domination in one market into the juice market, is bullshit. How can you possibly prove that? It’s ridiculous," said one lawyer, speaking off stage at Asialaw’s In-House Summit in Hong Kong.
There is also the possibility that Coke could impose trade restrictions. Being in a strong negotiating position with other suppliers for its Coke products might harm suppliers that do business with Huiyuan.
Secondly, industrial policy is likely to have played a role. The announcement said that it would threaten the survival of smaller juice businesses, which in the current economic situation would be a blow to the Chinese economy. “But this whole national champion argument has always been nonsense,” said the lawyer. “Surely what consumers want is the best, cheapest product. They don’t care where it’s from,” he added.
The block is expected to have a hugely damaging effect on M&A in the country and will cause a lot of companies to re-think their approach to China takeovers. “It will take a lot of deals where multinationals look to buy high profile Chinese companies off the table, or cause multinationals to look at smaller targets that are less likely to attract criticism and focus more on their regulatory strategy,” said Huckerby.