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China Coca-Cola merger on anti-monopoly grounds

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China Coca-Cola merger on anti-monopoly grounds

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China               Coca-Cola     blocks
merger on anti-monopoly grounds
■ The Anti-Monopoly Bureau of the                   soft drinks market. Euromonitor suggests
Ministry of Commerce of the People’s                that Huiyuan and Coca-Cola would have
Republic of China (MOFCOM) announced                had a combined 20-25% share of the
on 18 March 2009 that it had decided to             China fruit juice market, with Coca-Cola
prohibit The Coca-Cola Company’s (Coca-             alone accounting for around 10%.
Cola) agreed takeover of China Huiyuan                  In its press release announcing the
Juice Group (Huiyuan), China’s leading              prohibition decision, which it expands on
producer of fruit juices. The transaction           in a Q&A document issued on 24 March
had generated considerable publicity due            2009, MOFCOM states that:
to the prominence of the Huiyuan brand in            Coca-Cola is dominant in the market

China. Objections from competitors and                  for carbonated soft drinks in China.
trade associations had been particularly                This is evidenced both by Coca-Cola’s
vocal, despite the deal enjoying the                    market share and by its financial
support of key Huiyuan shareholders and                 strength, powerful branding and
management.                                             extensive distribution capabilities.
    The deal shows that acquirers in                    Allowing the transaction to proceed
China must be alive to a range of possible              would have permitted Coca-Cola to
competition concerns when doing deals,                  leverage that dominance by tying
even where the target is not a direct                   the sale of carbonated soft drinks to
competitor. Early consideration of these                Huiyuan’s juice drinks.
factors will be essential to ensuring a              Coca-Cola would have been able

smooth deal timetable and interaction with              to impose restrictive conditions on
the regulators for those doing deals in the             purchasers of its product portfolio,
mainland.                                               such as exclusivity.
                                                     As a result, small and medium sized

ReaSoning                                               domestic fruit juice companies risked
Though no data is made public in the                    having their margins eroded to a point
decision, a MOFCOM spokesman has                        where they would be squeezed out
confirmed that the relevant markets                     of the market. The transaction would
examined were those for (i) carbonated                  therefore have led to less choice for
soft drinks; and (ii) fruit juice (with the level       consumers in the market for juice
of substitutability between fruit juice types           drinks in China, leading in turn to
being too great to further sub-divide this              higher prices.
market). Coca-Cola is stated by MOFCOM               Barriers to entering the fruit juice

to have 60.6% of the Chinese carbonated                 market are high, due to the presence


14 perspective Summer 2009
                         features
   of existing brand names, and strong
   branding carries a great deal of value
   and meaning to Chinese consumers
   in this sector. The threat posed by
   potential new entrants is therefore low.

RemedieS
MOFCOM states that the prohibition
decision was preceded by substantive
discussions regarding possible remedies,
and that Coca-Cola twice approached
it in early March with proposed
undertakings. After evaluation of both
sets of undertakings, and subsequent
negotiations, MOFCOM opted to prohibit
the transaction. MOFCOM has the ability
to order prohibition on its own initiative.
     Press reports and subsequent
statements by MOFCOM suggest that
their primary concern was the addition
of the core HuiYuan and MeiZhiYuan
brands to the Coca-Cola portfolio, and
that divestment of both brands could have
been sufficient to secure clearance. This
is unlikely to have been commercially
acceptable to Coca-Cola, as they
represented perhaps the most valuable
assets being acquired.

analySiS
The clear message sent by this decision
is that MOFCOM will take a firm stance
in enforcing the merger control regime
and can prohibit mergers that it believes
will have a significant negative impact


           Summer 2009 perspective 15
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on competition in China, even where           a delicate balance between the acquisition      significantly lower than anticipated, due in
there is not a straightforward creation       of market power and protecting                  part to the prevailing economic climate. Of
or strengthening of a dominant market         incumbent players who may or may not            these, formal reviews have commenced
position through the addition of market       be operating efficiently. Coca-Cola is          in 29 cases, typically preceded by a
shares.                                       likely to have argued that the deal would       significant period of discussion with
     MOFCOM states that the transaction       create keener competition in the fruit juice    MOFCOM before the review clock is
was blocked not as a result of any alleged    sector, leading to all players becoming         formally started. This underlines the
dominance resulting from the deal (Coca-      more efficient and to lower prices for          cautious approach of MOFCOM to these
Cola’s high share in carbonated drinks        customers.                                      early cases, the level of data filings require
was not increased by Huiyuan’s share               With over 50% of the Chinese               in order to be deemed complete, and the
of the separate fruit juice market), but      carbonated drinks market, Coca-Cola             need for parties to plan accordingly.
by reasoning based around Coca-Cola’s         would have been presumed dominant                   Of the 25 decisions issued
ability to leverage a broader portfolio       under the AML and borne the burden of           to date, 23 have been unconditional
of products. Neither the decision nor         proving that it was not. Other factors,         clearances. One case, InBev’s global
subsequent statements indicate the            such as the developing state of the             acquisition of Anheuser-Busch, was
approach MOFCOM took to economic              markets concerned in China, are also            cleared conditionally, requiring InBev to
analysis of considerations such as how        likely to have been taken into account. It is   seek prior clearance from MOFCOM before
plausible it would be for Coca-Cola           notable that the combined share of Coca-        adding to its existing two minority stakes
to require exclusivity for its portfolio,     Cola and Huiyuan in the fruit juice market      in major Chinese brewing companies
particularly if the Anti-Monopoly Law’s       is not expressly stated as a reason for         Tsingtao and Zujiang, or buying into two
(AML) provisions on abuse of dominance        blocking the deal.                              further named Chinese breweries.
would make such conduct unlawful. Would            The AML also permits MOFCOM                    Like Coca-Cola’s acquisition of
buyers of carbonated and soft drinks          to take factors other than competition          Huiyuan, InBev/Anheuser Busch attracted
refuse the tie and construct their own        into account, such as China’s national          a great deal of opposition from domestic
portfolio consisting of Pepsi's carbonated    economic development. Industry suspects         brewers and the remedy imposed
drinks, plus those of rival juice brands,     that these factors may also have played         appears to have been devised as a
instead?                                      a role in reaching the prohibition decision.    mutual compromise between the affected
     Due to the confidentiality obligation    Both a MOFCOM Minister and an official          stakeholders. ■
imposed on it by the AML, MOFCOM              spokesman have publicly denied that
has not published any detailed evidence       MOFCOM has considered factors other
supporting its conclusions. However,          than competition during its review
there was clearly a significant level of      process.                                        Xiangyang ge
dialogue between MOFCOM and Coca-                  Huiyuan, though a China-based              Partner, Baker & mcKenzie
Cola, including at least four supplementary   business, is in fact structured as an
information requests, a series of hearings    offshore company, listed in Hong Kong. As       michelle gon
with competitors, customers and other         a result, no foreign investment review was      Partner, Baker & mcKenzie
stakeholders, as well as two sets of          required in China.
proposed remedies from Coca-Cola.                                                             Chunfai lui
MOFCOM’s announcement emphasises the          meRgeR ContRol —                                Special Counsel, Baker & mcKenzie
level of consultation and thoroughness of     the BiggeR PiCtuRe
the examination, something that is also       MOFCOM state that, as of 18 March               martin Commons
reflected in the draft procedural guidance    2009, they have received a total of 40          associate, Baker & mcKenzie
issued to date.                               filings under the AML, which took effect
     Antitrust regulators must often strike   on 1 August 2008. This number is


16 perspective Summer 2009

								
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