Coke’s Ambitions

Beijing-based, Hong Kong-listed and Cayman Islands-registered Huiyuan is a major force in China’s juice market. The research firm AC Nielsen says the company controlled nearly 43 percent of China’s pure, 100 percent juice market and about 40 percent of the nectar market in 2007.

Coca-Cola’s share of the Chinese juice market in 2007 was 9.7 percent, according to Euromonitor.

Coca-Cola offered Huiyuan’s top three stakeholders – Huiyuan Juice Holdings Co., Groupe Danone S.A. and Gourmet Grace, whose combined holdings account for 66 percent – a buyout at HK$ 12.20 per share. The offer was almost three times higher than the closing price on the day before Huiyuan’s unveiling of the plan September 3. It was also the highest share offer since Huiyuan’s IPO on February 23, 2007.

Why was Coca-Cola willing to pay a premium? A senior executive with a Chinese state-owned enterprise close to Coca-Cola called the U.S. company’s proposed buyout an example of “engaging the Chinese market first and making money later.”

Coca-Cola’s long-range reasoning was clear. The company hoped to profit based on Huiyuan’s potential for growth.

Euromonitor predicts China’s juice market will grow 14.5 percent annually for the next five years. Total consumption is expected to top 19.1 billion liters by 2012.

Although Huiyuan is the leading maker of 100 percent juices and fruit nectars, it controls only 8.5 percent share of the total juice market nationwide, according to Euromonitor. Coca-Cola ranks No. 1 with 11.8 percent, thanks to the success of its Minute Maid fruit drinks.

Coca-Cola also knew that the global soft drinks business has been heading downhill for years. Coca-Cola’s soft drink sales in the United States, for example, fell 5 percent over the first three quarters of 2008. To diversify, Coca-Cola as well as its main rival Pepsi have been giving more attention to non-carbonated drinks, such as juice.

The Huiyuan deal would have been the second largest purchase ever for Coca-Cola, and the largest foreign acquisition ever in China.

Coca-Cola CEO Muhtar Kent said he highly valued the brand Zhu built. “Huiyuan is a long-established and successful juice brand in China and is highly complementary to the Coca-Cola China business,” Kent said.