Bottles of Coca-Cola sit on the shelves of a store in Beijing Wednesday

China has rejected Coca-Cola’s planned US$2.4 billion acquisition of top juice maker Huiyuan Juice, saying the deal would have been bad for competition.

Observers said China’s ruling on Coke could cut both ways in that Chinese firms that have been making increasingly high profile acquisitions abroad may run into trouble of their own.

Australia’s Foreign Investment Review Board is considering three big investments by Chinese state-run companies in its mining sector.

In particular, political opposition to Rio Tinto Ltd’s planned $19.5 billion tie-up with Chinese state-owned Chinalco has been intensifying, and on Wednesday the Australian Senate said it would launch its own inquiry into foreign investment.

“It indicates that foreign acquisitions of Chinese companies, particularly those with prominent brands, will not be regarded favorably by the Ministry of Commerce,” said Lester Ross, managing partner with the WilmerHale law firm in Beijing.

“And that, conversely, indicates that Chinese companies seeking to make acquisitions overseas may encounter an adverse reaction in those markets, if foreign companies are essentially frozen out of the Chinese market in terms of expansion through acquisition,” he said.

Competition

China’s Ministry of Commerce said in a statement the Coke deal would have been bad for competition and Coca-Cola’s changes to the deal were insufficient to allay its concerns, rejecting the transaction under an antimonopoly law enacted last year.

A Coca-Cola spokesman in Hong Kong did not have an immediate comment, and an official with Huiyuan could not immediately be reached for comment.

JPMorgan analyst Selina Sia said the ruling was not a surprise.

“If Coke were to take over Huiyuan, it will dominate the soft drinks market in China, which not only hurts consumers, but also other sector participants,” she said.

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.

Jeffery Lau, an analyst with Polaris Capital in Hong Kong, said the ruling confirms that China remains unwilling to allow the takeover of a national brand.

“But this is not exactly a huge surprise. Protectionism has been on the rise everywhere this year,” he said.

Tit for tat?

Last year, after three years of talks, US private equity firm Carlyle Group walked away from a plan to buy Xugong, China’s biggest construction equipment maker, after running into bureaucratic obstacles.

China has itself been snubbed in overseas acquisitions, most notably in 2005 when US political opposition blocked CNOOC Ltd’s $18.5 billion bid for oil company Unocal.

Shares in Huiyuan were suspended from trading earlier on Wednesday after slumping nearly 23 percent following a Financial Times report that Coca-Cola might drop its bid for Huiyuan after Chinese antitrust regulators signaled it would have had to relinquish the Huiyuan brand after the acquisition.

Huiyuan shares had traded below Coca-Cola’s HK$12.20 ($1.57) per share offer price, indicating investors doubted the deal would go through.

Source: Reuters