Coke Expected to Get OK for Huiyuan Juice Purchase

SHANGHAI/HONG KONG (Reuters) – Chinese authorities are expected to grant a conditional approval soon to Coca-Cola Co (KO.N) for its $2.5 billion purchase of Huiyuan Juice after the world’s largest soft drinks maker pledged to invest another $2 billion in China over the next three years.

The deal, the biggest foreign acquisition of a Chinese company, had some investors worried that Beijing may reject it to protect Huiyuan as a national brand.

But legal, financial and government sources familiar with the situation told Reuters that a recent visit to China by Muhtar Kent, global president and chief executive of Coca-Cola, helped pave the way for the deal to be completed.

China’s commerce ministry (MOC), six days away from a key deadline for the deal, is expected to clear the agreement but with certain conditions, said the sources, who declined to be identified due to the sensitive nature of the deal.

In addition to keeping the Huiyuan brand, Coca-Cola may be told to maintain contracts with local farmers concerned about their future relationship with the U.S. firm, said the sources.

“I expect a conditional clearance with restrictions and conditions that play to the domestic audience,” said one lawyer who is watching the case closely but is not involved in the deal.

The deal has received heavy attention globally, not just because of its size but because it represents the first major acquisition to test China’s new anti-trust rules.

“We are in very regular contact with the MOC, and we try to be as helpful as possible in answering questions and providing supplementary information,” Coke spokesman Kenth Kaerhoeg said in a statement, adding it would be inappropriate to speculate about when the ministry would be able to finalize the approval process.

ONCE IN DOUBT

According to two Chinese lawyers with knowledge of the deal, Coca-Cola submitted its application for Beijing’s anti-trust investigation in mid-September, and was told in early November that the MOC needed more documents.

According to Chinese M&A rules, the MOC offers a so-called “30-day Fast Track” to approve less sensitive or smaller deals involving foreign investments. Other approvals can be extended to 90 more days plus an additional 60 days if necessary.

Beijing’s influential Caijing magazine reported last month the MOC held a closed-door hearing on Dec. 26 to seek advice and hear from Huiyuan’s domestic rivals and drinks industry groups.

Some participants objected to the deal, citing protection of Huiyuan as a national brand as well as concerns about Coca-Cola’s growing monopoly power in China’s soft drink markets where small local juice makers may be hurt.

Huiyuan controls more than a tenth of a Chinese fruit and vegetable juice market that grew 15 percent last year to $2 billion. Coca-Cola has a 9.7 percent market share and dominates in diluted juices. China is Coke’s fourth-largest market and a key battleground with rival PepsiCo Inc (PEP.N).

Lawyers and bankers close to the process say the political pressures on the government over this deal have been significant.

While Beijing wants to signal that China is open to foreign investment, it does not want to be seen as easily surrendering national interests and brands, said the sources.

“Initially, many people believed it should be not too difficult for Coca-Cola to win approval for the deal as you can’t really argue if orange juice can be a strategically sensitive industry that may impact China’s national security, unlike the Xugong deal,” said one source.

Last year, U.S. buyout giant The Carlyle Group [CYL.UL] walked away from three years of talks to buy Xugong, China’s top construction equipment maker, after hitting bureaucratic buffers.

“Beijing decided to give the deal a serious and tough review after it saw growing concerns and objections from Huiyuan’s local rivals and some pro-nationalism marketwatchers,” said the source.

By late last month, Huiyuan Juice Group’s (1886.HK) Hong Kong listed shares traded around 25 percent below Coke’s HK$12.20 per share offer, suggesting doubts that the deal would go through.

Those doubts were further stoked on Feb. 27 when Huiyuan Chairman Zhu Xinli said there was internal opposition within Coca-Cola’s board about going ahead. Huiyuan later clarified the comments.

Huiyuan’s stock has risen sharply in the last two weeks, to $10.50, or around 14 percent below the Coca-Cola offer.

Kent, a strong supporter of the Huiyuan deal, has already told his China managers to be well prepared for integrating the businesses, said a source briefed on Kent’s Shanghai trip.

To accelerate the integration, Coca-Cola has hired consultant McKinsey & Co to set up a “100-Day Integration Plan” to be put into operation once the deal is approved, said the source.

Kent has assured Chinese officials that Coca-Cola will invest more in China to create jobs and protect Huiyuan farmers’ benefits and the Huiyuan brand, said the source.

On Tuesday, the MOC said it has the option to delay a decision for 60 days, but it also held out the possibility that a decision could be made by Friday.

By George Chen and Michael Flaherty

(Editing by Ian Geoghegan)