Very few people know the closely guarded secret formula that Coca-Cola uses to make its world-famous soft drink. And no one knows the formula that Chinese regulators will use when deciding whether to approve that company’s request to purchase Huiyuan Juice Group.
The case is the first test of China’s anti-monopoly law, which came into effect on August 1. Although the government has said the US$2.3 billion deal will be judged on the principles of a market economy, the law is as ambiguous as the attitudes of the regulators responsible for enforcing it.
If approved, Coca-Cola’s acquisition would be the largest foreign takeover in Chinese history. It is a situation laced with potential flashpoints, and the implications for China’s juice industry are no wider than those for foreign-led M&A in the country as a whole.
Regulators could easily block the deal for one of two reasons: That it would be bad for competition, and that it would endanger a national brand.
There is room for debate on both issues. On the one hand, Huiyuan and Coca-Cola are the two largest players in China’s fruit and vegetable juice industry; on the other, this is a highly fragmented industry and a bit of consolidation and foreign savvy might do it some good. Similarly, while the Huiyuan brand would pass out of Chinese hands, Coca-Cola has promised to retain the name on its products.
The unknown factor is public opinion. Early signs were not good for Coca-Cola, as various Chinese online polls came out in opposition to the deal. It remains to be seen which way sentiment will swing – or in which direction it might be pushed. Every foreign dealmaker in China knows the story of Xugong, the construction equipment manufacturer that was subject to a takeover bid by Carlyle Group, the US private equity firm. What appeared to be a slam dunk ended up bouncing off the rim as opponents of the deal whipped up a nationalistic frenzy, leaving Beijing little option but to withhold its approval.
This time the process will be more formal and both parties have agreed to cooperate fully with regulators. Depending on which way the regulators go, it will be remembered as either a positive statement about free market investment or a sad confirmation of suspicions that Beijing plays by its own rules.
Meanwhile, Coca-Cola should be busy making friends with people of influence – if it hasn’t already done so. Such is the sensitivity attached to foreign investment in China, or Chinese investment overseas, that it pays to placate your demons before they devour you.
Ultimately, this landmark deal may be far more normal than is made out: More about managing relationships than managing legislation.