Shanghai (AFP) Sept 3, 2008
Coca-Cola moved Wednesday to further strengthen its global reach by announcing plans to buy Huiyuan Juice Group for 2.4 billion dollars, the US soft drink maker's biggest acquisition in China.
The deal, which Chinese authorities have yet to approve, is part of the drive by the world's largest soft drink maker to buy up juice, water and other non-carbonated drink producers around the globe to diversify its product lines.
"Huiyuan is a long-established and successful juice brand in China and is highly complementary to the Coca-Cola China business," said Muhtar Kent, CEO of Coca-Cola Co., in a statement.
He said the deal was "a unique opportunity to strengthen our business in China, especially since the juice segment is so dynamic and fast-growing."
The transaction represents a huge increase in Coca-Cola's investment in the rapidly growing Chinese market. According to its Chinese website, its accumulated investment in China since 1979 totalled 1.25 billion dollars.
If approved by local authorities, the deal would be the largest takeover by a foreign firm of a Chinese company, said Arthur Kroeber, managing director of the Beijing-based economics research firm Dragonomics.
"Coke's in an interesting place in China: They've been here forever -- they've been here for 30 years -- (but) there's not a whole lot of profit growth for them in their existing soft drink market," he said.
"You have huge volumes, but your margins are always microscopic, so you need to look at how you can diversify into new products lines."
Coca-Cola and rival PepsiCo do not release China-specific sales figures.
But Coca-Cola is believed to be the market leader in carbonated drinks, while Chinese drink maker Wahaha dominates the non-carbonated drink segment, Shanghai Securities analyst Guo Changsheng said.
As part of its global efforts to expand beyond carbonated drinks, Coca-Cola acquired Russian juice business Multon in 2005 and Mexico's second largest juice, nectar and fruit flavoured beverage producer Jugos del Valle, last year.
The acquisition of Huiyuan would be Coca-Cola's second largest after it bought specialist water and energy drinks maker Energy Brands, Inc., known as Glaceau, for 4.1 billion dollars last year.
Coca-Cola will offer 12.20 Hong Kong dollars (1.6 US dollars) per share in Hong Kong-listed Huiyuan, the US company said in a statement.
This represented about three times the market value of the Chinese company.
It added that three shareholders owning a total of 66 percent in the company had accepted the offer.
Huiyuan, one of China's best-known juice brands, generated total sales of 2.7 billion yuan (395 million US dollars) last year, according to France's Danone Group, which agreed to sell its 23 percent stake in the company.
That sales figure represented 40 percent of China's growing juice market share, analysts said.
Coca-Cola said it intended for Huiyuan to carry on its business, but that it would later review its operations.
The proposed purchase is a long-term move based on expectations that Chinese demand for concentrated juices will increase with rising incomes and healthier lifestyles, said Kevin Luo, a Shenzhen-based analyst with Guotai Junan Securities.
"The high-concentration and pure juice market will start to grow rapidly in coming years because they are more healthy," Luo said.
"It's the long-term growth potential that took Coca-Cola's fancy and attracted it to pay such a high price."
Currently, low-concentration drinks containing 10 percent or less pure juice are the biggest sellers among Chinese consumers, accounting for 70 percent of sales, Luo said.
Huiyuan controls nearly 80 percent of China's high-concentration, or pure juice, juice market.
However, the deal still requires approval by Chinese regulators, and they have been reluctant to approve some recent foreign acquisitions.
US private equity firm Carlyle Group abandoned a three-year attempt to buy a stake in Chinese construction machinery maker Xugong Group after regulators failed to approve the deal.
Huiyuan shares more than doubled Wednesday to close at 10.94 Hong Kong dollars.
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