2nd UPDATE: Coca-Cola To Buy Huiyuan Juice Group For US$2.4B
By Daniel at 3 September, 2008, 9:25 am
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HONG KONG (Dow Jones)–Coca-Cola Co. (KO) said Wednesday it plans to buy beverage
producer China Huiyuan Juice Group Ltd. (1886.HK) for US$2.4 billion, in what
will be the Atlanta-based company’s second-biggest acquisition ever.
Coca-Cola’s offer sounded high to analysts, but they said the company has to pay
a big premium to expand further into China’s increasingly competitive beverage
market. In recent years, the U.S. soft-drink giant has been acquiring companies
around the world that make juice, water and other noncarbonated drinks, to
broaden its portfolio and beat back competitors.
Coca-Cola offered HK$12.2 in cash per Huiyuan share - triple the stock’s price of
HK$4.14 before it was suspended Monday. The deal would be the biggest foreign
takeover of a Chinese company, according to Thomson Reuters data.
Coca-Cola’s largest acquisition was the US$4.1 billion purchase of Energy Brands
Inc., a New York-based maker of Vitaminwater, in 2007.
Huiyuan shares more than doubled early Wednesday in heavy volume as trading
resumed, but they gave up some gains to trade at HK$10.86 at 0742 GMT.
Analysts said concerns about possible regulatory delays appeared to have held the
shares below the offer price.
Investors also pushed up shares of another Chinese juice maker, Yantai North
Andre Juice Co. (8259.HK), which rose as much as 31% during the session on
speculation it, too, could become a takeover target.
Sun Hung Kai Financial analyst Fiona Wong said the price of the deal, which has
the support of three top Huiyuan shareholders, represents about 30 times
Huiyuan’s forecast 2009 earnings. She said that is a steep premium to Huiyuan’s
11 times price-to-earnings ratio before the deal was announced, but added the
juice company could be a good fit in China for Coca-Cola.
Analysts say Beijing-based Huiyuan, which produces fruit-juice and nectar
products in China, has a share of more than 40% of the country’s pure fruit juice
market. It also has a share of about 40% of the market for nectar products, they
say.
“Huiyuan appears to be the only choice for Coca-Cola in China, because Huiyuan
has the biggest share of the pure fruit juice market,” Wong said.
“Coca-Cola will be able to get all of Huiyuan’s customer base and production
plants once the deal is closed, so it doesn’t need to build a distribution
network from scratch.”
Huiyuan, which listed in Hong Kong in February 2007, declined comment Wednesday
beyond a statement outlining the deal.
Buying An Established Brand
Coca-Cola said it plans to further develop the Huiyuan juice brand to “address
the evolving needs of the Chinese consumer” and it expects operational and cost
efficiencies.
“Huiyuan’s established brand is another reason why Coca-Cola is willing to pay
such a high price,” said Renee Tai, an analyst at CIMB-GK Research.
She said sales growth of the U.S. firm’s carbonated beverages in China is
sluggish, which it explains its push into the noncarbonated beverage business.
Tai said Huiyuan’s core pure juice segment is “the cream of the juice market,”
with gross profit margins of about 40%, compared with 20% to 25% for other juice
drinks.
Coca-Cola said it expects the Huiyuan deal to be dilutive to its earnings per
share by US$0.03 to US$0.04 in the first full year following completion, but
expects the deal to boost EPS in the third year.
It said it hopes to take Huiyuan private, on condition it gets support from 90%
or more of Huiyuan’s shareholders.
Coca-Cola and Huiyuan said in a joint statement three big Huiyuan shareholders,
controlling almost 66% of the shares, have signed an “irrevocable undertaking” on
the deal.
They are Huiyuan’s parent, China Hui Yuan Juice Holdings Co., which owns 38.5% of
the company; Groupe Danone SA (BN.FR), which has a 21% stake; and Warburg Pincus
Private Equity LP, which has a 6.4% stake.
Danone confirmed separately Wednesday that it had agreed to sell its entire
shareholding in Huiyuan.
Coca-Cola also said it will also offer a price equivalent to HK$12.2 a share for
Huiyuan’s outstanding convertible bonds and options.
Analysts said the acquisition could prompt similar deals in China’s beverage
industry.
“Many food and beverage firms overseas aren’t hit by the U.S. subprime problems
and they are literally cash cows,” Wong said. “Plus shares of many Chinese food
and beverage firms have fallen sharply in recent months, so I wouldn’t be
surprised if there will be more deals to come.”
Huiyuan had been gradually falling from a peak of HK$12.00 per share on Sept. 7,
2007, on concerns over weakening consumer demand and rising raw material prices.
Royal Bank of Scotland Group PLC (RBS) advised Coca-Cola on the deal, while
Goldman Sachs Group (GS) advised Huiyuan.
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