Coca-Cola Co will pay $2.5 billion for Chinese juice maker Huiyuan, triple its value, strengthening the world's leading drinks maker's hold on a booming market in the biggest foreign takeover in China.
The US firm will pay HK$12.20 a share in cash - 43 times Huiyuan's forecast 2008 earnings and nearly three times its Friday close of HK$4.14, sending the Chinese firm's shares up 170%.
Major acquisitions have slowed to a trickle in past years in a fragmented Chinese consumer industry as companies struggle with fierce competition and a slide in margins. Local brand names are also known to resist foreign control.
Coca-Cola dominates the Chinese diluted-juice market and hopes to make inroads into the pure-juice sector, analysts say.
“Coca-Cola is looking to tap the pure juice market where Huiyuan is the market leader,” said Emma Liu, an analyst with Nomura Securities.
“Though it's a relatively small market in the beverages space, it's a high-growth market because of the growing personal income in China and increased health awareness.”
The Chinese juice market - encompassing pure juice, diluted juices and nectars - is expected by analysts to grow at above 10% in coming years alongside rising incomes, benefiting Huiyuan, Tingyi, Uni-president and others.
Huiyuan controls about 43% of the pure-juice market, according to AC Nielsen figures cited by the company.
“They are in the same industry and it would take a lot of effort to build a brand name, especially in China, (which is) such a huge market,” said Andrew To, sales director at Tai Fook Securities Co Ltd. “The premium is being paid for Huiyuan's brand name and sales network.”
Huiyuan expects its revenue to grow five-fold in 3-5 years to 10 billion yuan ($1.46 billion) from 2 billion yuan in 2006.
Coca-Cola will buy all outstanding shares, bonds and options of Huiyuan and take the company private after the acquisition.
“Huiyuan is a long-established and successful juice brand in China and is highly complementary to the Coca-Cola China business,” said Muhtar Kent, chief executive of Coca-Cola.
Huiyuan is about 23% owned by French food giant Groupe Danone and 6.8% owned by US private equity firm Warburg Pincus & Co.
Coca-Cola's purchase marks the largest-ever takeover in China, where inbound M&A deals are notoriously difficult given state dominance of the corporate sector and regulatory red tape.
The only larger acquisitions by foreign companies in China have been for minority stakes in the country's banks, Thomson Reuters data show. Chinese inbound corporate deals are up 30 percent from the same period a year ago, to $15.3 billion.
Coca-Cola was advised on the deal by Royal Bank of Scotland and Huiyuan was advised by Goldman Sachs (Reuters)