Huiyuan's Calculated Deal with Coca-Cola
09-18 18:33 Caijing Magazine
No one forced the founder of China's juice maker Huiyuan to sell to the beverage giant. And Zhu Xinli is still in business.
By staff reporters Zhao Hejuan and Wang Shanshan
At first glance, the pending takeover of China's largest juice maker Huiyuan by the Coca-Cola Co. appears to be simply another swallowing of a smaller but popular hometown brand by the global beverage beast.
It's true that the HK$ 17.9 billion deal for 66 percent of Huiyuan Juice Group Ltd. (HKSE: 01886), which is now being reviewed by Chinese anti-trust regulators, would give Coca-Cola a big foothold in China's booming juice market. It would also give the U.S. company a new inroad into the non-carbonated drinks business, which it's expanding to compete against global rivals.
The two companies announced the deal September 3 and signed all relevant documents for what would be the biggest Chinese takeover by a foreign company, and the second largest transaction in Coca-Cola's history.
But the deal also includes a major role – and plenty of future profit opportunities – for Huiyuan founder and Chairman Zhu Xinli, as well as a network of fruit plantations, package box manufacturers and other enterprises he controls in China that provide crucial upstream resources for the juice maker.
Sources familiar with Zhu told Caijing that the decision to sell to Coca-Cola was carefully planned, and took into consideration his own future and the future development of Huiyuan.
After the sale of the business – whose growth prospects actually have been slowing – Zhu would continue to control the upstream businesses that would be the main suppliers for Coca-Cola's juice business in China.
The deal calls for Zhu to sell his 38.45 percent stake for HK$ 12.2 per share. At the same time, Huiyuan's other two major shareholders – Danone Group and Warburg Pincus Private Equity – would sell to Coca-Cola their respective stakes of 20.96 percent and 6.37 percent.
Coca-Cola also won the option to buy the remaining stakes, giving it complete control of Huiyuan, in the future, after Huiyuan is delisted from the Hong Kong exchange.
Deal Disputes
Not everyone is happy about Zhu's deal. In fact, the proposed sale has triggered fierce public disputes, with some critics labeling it as another failure for a Chinese domestic brand and others expressing worries that Coca-Cola might monopolize China's juice market.
But Zhu said he was "very satisfied" with the offer, which was announced after quiet negotiations that, according to sources close to the deal, also led to a confidentiality agreement between Huiyuan and Coca-Cola.
Zhu had rejected a proposal to sell the company five years ago, saying he wanted to build Huiyuan into a long-lasting brand. This time, after several rounds of talks, the Coca-Cola offer apparently surpassed all expectations of Zhu and other major shareholders.
Market rumors said Zhu's hand was forced by shareholder Danone, the giant French food company that holds pre-emption rights and a put option to sell its Huiyuan stake. But Zhu denied the rumors, declaring that the decision was based on "my own willingness."
Both Zhu and Danone stressed that the sale to Coca-Cola was a normal business move. Zhu had been clear about what he wanted, a source close to the chairman said, and could not have been forced into a sale.
"I believe he has struggled, but it is a good deal," the source said. "And Zhu also has his own considerations."
Huiyuan's Bottleneck
Established by Zhu in 1992, Huiyuan quickly became China's largest juice producer. According to the market research firm AC Nielsen, the company held a nearly 44 percent share of China's 100 percent juice market at the end of June as well as 42 percent of the nectar market.
However, due to rapid expansion, the company has been under capitalization pressure for years. A successful listing in February 2007 on the Hong Kong stock exchange helped relieve some of the pressure. But new challenges such as inflation, fierce market competition and management changes emerged.
Xie Lin, a consumer industry analyst for JP Morgan Chase, said China's juice industry has been squeezed by inflation this year. "Inflation will inevitably restrain consumption of juice since it is not a daily necessity," said Xie.
Understandably, then, Huiyuan's growth has shown signs of a slowdown this year. According to first half financial results, the company posted 1.29 billion yuan in sales revenue, down 70 million yuan from the same period 2007. Net profit for the first six months was 392 million yuan, down 22 percent year-on-year.
For the initial public offering last year, Huiyuan stock was set at HK$ 6. Since then, the price surged to a peak of HK$ 12 per share but started slumping this year. By the time trading in the stock was suspended in advance of the Coca-Cola sale announcement, Huiyuan's share price had slipped to HK$ 4.
Investors had been watching Huiyuan struggle. To reduce spending, the company slashed employment this year to 7,180 from 9,772 workers at the end of last year. The company called the move an internal reshuffle. Meanwhile, production and raw material costs have been rising at a time when juice prices remained stable, squeezing profit margins.
Luo Lei, an analyst at Guotai & Junan Securities, told Caijing that a product shortage, not rising material prices, dragged down Huiyuan's growth.
"The price rise for raw materials for juice varies according to the seasons," Luo said. "So the major problem for Huiyuan is a lack of better products. Moreover, the company also has holes in its marketing strategy."
According to Luo, management flaws and a shortage of incentive measures discouraged Huiyuan dealers, bogging down the sales channel.
A source close to Zhu said future development of the market and industry factored into his decision to sell. High costs for the sales channel and competition in the market apparently triggered the decision.
Juice Market in Flux
The deal will undoubtedly require changes for Coca-Cola and Huiyuan – as well as for the rest of the Chinese juice market.
As carbonated drinks demand falls worldwide, Coca-Cola has been counting on non-carbonated drinks for expansion. Huiyuan offered a clear solution.
"Huiyuan is a successful brand in China. It will be an important supplement to Coca-Cola's business in China," said Muhtar Kent, CEO and president of Coca-Cola.
Coca-Cola spokesperson Li Xiaoyun said the company has been eyeing China's booming non-carbonated drinks market for some time. Until now, it's held only a fraction of the market.
Industry analysts think that, in addition to Huiyuan's juice business, the company's upstream resources are attractive to Coca-Cola.
"Neither the brand nor the sales network are Huiyuan's advantages," said Xie. "The only advantage for Huiyuan is the upstream resources."
Caijing learned that Zhu and Coca-Cola signed a cooperation agreement giving the buyer access to Huiyuan's upstream resources. At the same time, Zhu companies will be priority materials suppliers.
Zhu understands the value of Huiyuan's upstream businesses, and has agreed with Coca-Cola not to compete within the next two years. Meanwhile, he will be allowed to run businesses including the manufacturing of juice containers, packaging and raw materials such as fruit.
These upstream businesses comprise what Zhu calls his "future dream."
According to Zhu, his businesses would provide Coca-Cola with the fruit and other materials needed to supply juice products in China. Currently, Coca-Cola makes juice in China with materials from Brazil.
Zhu would thus win an important role in Coca-Cola's global procurement system. "Maybe someday, he will create a brand of upstream business as famous as Huiyuan," said a friend of Zhu's.
The takeover of Huiyuan is also seen as a new starting point for Coca-Cola in the Chinese market. The company currently runs a wholly owned subsidiary called Coca-Cola China Industries Services Ltd. and has joint ventures with two partners, Swire Group and COFCO Group. Market rumors have said Coca-Cola is mulling a buyout of the COFCO venture, but the company denies it.
The market also has speculated about Coca-Cola's next buying target. Two rumored possibilities are beverage company Wanglaoji, and food and drinks processor Master Kong. A source close to Coca-Cola told Caijing the company has long eyed China's promising drinks makers, but there is only a small chance that it will launch another purchase so soon after a Huiyuan deal.
Meanwhile, China's juice market is seeing rapid growth. According to the research firm Euromonitor, the market's compound growth rate has reached 14.5 percent, and the annual sales volume is expected to top 19 billion liters by 2012.
Some worry that a Huiyuan takeover will give Coca-Cola monopoly status in China's juice market and hurt smaller domestic brands. The company's "dominance in resources and sales channels will make other competitors hard to enter the market, which will hurt both producers and consumers," said Xie.
Coca-Cola will have a 40 percent market share in the 100 percent juice and nectar sectors in China. But these markets combined account for only 20 percent of China's entire juice market.
Luo expects the deal to be an impetus for the development and structural adjustment of China's juice market, as Coca-Cola will likely use Huiyuan resources and its sales channel to further diversify products and expand businesses.
"If Coke can boost China's juice consumption, it will be a good thing for us," said Luo.
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[ICP License: 090027] IDC License:[B2-20040250] Advertising Business License:[京海工商广字第0407号] 京公网安备110105005607号
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