CONSUMER: Coke Tries China M&A Again With Protein Drink Maker
Bottom line: Coke’s proposed $400 million purchase of a Chinese protein drinks maker is likely to get quick regulatory approval, and could make significant contributions to its China operations within the next 2 years.
Six years after a high-profile failure for a major China acquisition, global beverage giant Coca Cola (NYSE: KO) is trying once again with a smaller plan to buy a Chinese maker of protein drinks. This latest play for the maker of China Green-brand drinks looks like a smarter move by Coke, since the deal is valued at a relatively modest $400 million. By comparison, Coke’s failed attempt to buy leading Chinese juice maker Huiyuan (HKEx: 1886) was valued at $2.3 billion, which drew strong scrutiny from China’s anti-monopoly regulator that ultimately vetoed the deal in 2009.
Much has happened in the last 6 years that makes Coke’s latest bid for Xiamen Culiangwang Beverage Technology Co (HKEx: 0904) look more likely to get approval. Perhaps most importantly, the anti-monopoly regulator has gained valuable experience in regulating M&A, weighing in on a broad range of domestic and international deals with growing confidence. China only rolled out its current anti-monopoly law in 2008, and thus the regulator had very little experience when it vetoed the Coke-Huiyuan deal in 2009, amid speculation that nationalistic factors could have played a role.
Since that decision, Huiyuan’s own prospects have dimmed somewhat due to stiff competition in the market. That’s providing a valuable lesson for the regulator that markets are continually changing, and today’s famous brands like Huiyuan could easily become tomorrow’s failures if they don’t continually innovate and find new strategic partners.
All that said, let’s look at Coke’s latest M&A attempt that would see it purchase a south China maker of drinks based on proteins from foods like red and green beans and walnuts. (English article; Chinese article) Culiangwang’s market value stood at about $165 million before a trading halt to announce the deal, meaning Coke would be paying a big premium for the company. But then again, $400 million is a tiny sum for a company the size of Coke, which is China’s largest beverage seller.
A quick look at the financials of both Ciliangwang and Huiyuan show the difficulties that China’s beverage market is going through, due to stiff competition and as the economy slows. Huiyuan’s revenue grew by just 2 percent last year, while Culiangwang’s actually shrank by about 3 percent in its most recent reporting period. But Culiangwang was still quite profitable, while Huiyuan was firmly in the red for their latest reporting periods.
Coke’s choice of first Huiyuan and now Culiangwang reflect the reality that Chinese consumers are becoming increasingly health conscious, moving away from Coke’s own sugar-rich products towards healthier drinks like fruit juices and protein drinks. Both of these choices look like smart diversification moves that cater to local tastes for things like fruit and walnuts, and should help Coke boost its presence in the market for healthier, more upscale drinks.
That brings us back to the question of what kind of resistance this deal could meet from China’s regulator, and what will happen next if the deal gets approved. As I’ve said above, I do think the anti-monopoly regulator has gained a wealth of valuable experience over the last 6 years and therefore is likely to approve Coke’s new deal with little or no opposition. What’s more, Culiangwang’s size is about one-quarter that of Huiyuan, so the regulator would really have little reason to cite anti-competitive reasons for any opposition.
If and when the purchase is approved, look for Coke to quickly pour its vast resources into Culiangwang to boost sales of the company’s protein drinks. Coke already has vast distribution and bottling networks throughout China that should become available to Culiangwang’s drinks, allowing them to quickly return to a strong growth track. On the whole this deal looks like a good fit for both Coke and China, and I would expect to see it close in the next 3 months and start making significant contributions to Coke’s China operations in the next 2 years.
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