Fears China may block Coca-Cola's proposed $2.4 billion take-over of China Huiyuan Juice Group has taken the fizz off what would potentially be the biggest overseas acquisition for mainland China.
While fruit juice is hardly a strategic industry -- and Huiyuan is also a private company -- disquiet has focused on excessive market share, with 43% of the juice market. Rumblings are that, after inking a new competition law earlier this year, mainland officialdom is itching to give it a run out. Now the market is worried the deal may be shelved, as Huiyang's shares retreated Friday.
Such a move might be popular, going by reports that 76,000 people voted their disapproval of the deal in an online poll.
But ask what approval rating it would get if it were mentioned these foreign buyers could kick-start a stock market recovery? A whole lot more surely.
That might be a stretch given this is only one deal and Huiyuan (HK:1886: news, chart, profile) is listed in Hong Kong, but M&A can be a valuable counterweight to the kind of deeply bearish equity sentiment that has engulfed mainland equities.
We have seen this in shareholder-driven M&A activity in Western equity markets time and again. Owners of businesses looking at undervalued cash-generating assets can take a longer-term view and look past the immediate fear of further equity losses.
In China, there have been few deals of significant size, with uncertain regulation and an overbearing state viewed as key hazards.
If mainland authorities truly want their beaten-down equity markets to find some support, they should signal they are willing to roll out a welcome mat for value-focused M&A deals, not the reverse.
This arguably has more of an urgency, as trend-chasing mainland investors have yet to learn how to do value investing. Instead they wait for their government to mount an equity-market rescue or brow beat local money mangers to stop being bearish.
Notably Warren Buffet, a prominent shareholder in Coke has been talking more about making acquisitions in China again.
Perhaps he was prodding the Coke board to act. His comments on China come with added gravitas after he sold the bulk of his PetroChina shares last October at the market's high.
The Coke offer itself is HK$12.20 a share in cash, almost triple Huiyuan's HK$4.14 closing price before the deal was announced last Tuesday. After jumping 173% last Tuesday, shares pulled back to finish at $9.60 Friday in the intervening uncertainty.
If the transaction does get caught up in political red tape or postponed, it clearly still has some way to fall, although for those willing to bet on the deal going through, a tidy profit clearly awaits. Hedge funds specializing in M&A risk arbitrage may find this is one deal that is too hard to call. Danone and the chairman, the two major shareholders, have agreed to the offer, which means the only deal-breaker is the Ministry of Commerce.
If the deal does go ahead, and if China is going to get more relaxed on restructuring, we may get some follow-up action in the sector. Other names to watch include Uni-President , which hold the No. 2 spot with 21.2% market share, and Tingyi the No. 3 juice maker. Also keep an eye on the smaller juice makers -- Yantai North Andre Juice and China Haisheng Juice.
Coming back to valuations, it was noticeable that some brokers, and not just Coke, are now getting more bullish on China, despite the sinking markets.
Merrill Lynch said in a strategy note last week: 'China looks to be the best macro trade today in our view. Risk-reward has improved: policy turning pro-growth, and the MSCI China is now cheaper than the U.S.'
So if you are looking for an end-of-year rally, China-related names my yet be worth looking at.
For Coke and investors in Huiyuan, however, it will still be an anxious next few weeks. Looking for a sympathetic ear, you can expect Coca Cola might remind mainland Chinese officials just who was one of the title sponsors at their Beijing Olympics.
Craig Stephen |
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