Coca-Cola and China

Hard to swallow
Mar 19th 2009 | HONG KONG

From The Economist print edition

China indicates the real targets of its anti-monopoly

law: outsiders

LAST August, after 14 years of debate, the Chinese government at last imposed what
was informally referred to as its “economic constitution”, a broad anti-monopoly law
for a country rife with state-imposed monopolies. Since then people have wondered
how the law would be applied, and whether it would advance China’s transformation
into a market economy, or serve as an impediment to genuine competition. On March
18th an answer emerged with the rejection of the largest outright acquisition by a
foreign firm, a $2.4 billion offer by Coca-Cola for China Huiyuan, China’s largest
juice company.

When the deal was announced last September, it was at a price three times Huiyuan’s
valuation. Since then, as global markets have collapsed, it has only become more
appealing. Huiyuan is a private company and juice had previously been free of
government control, so theoretically it should have been available for purchase. “It is
a very unfortunate outcome in an industry that has no economic or national-security
significance,” says Lester Ross of WilmerHale, a law firm, in Beijing.

The most benign interpretation of the rejection being bandied about by lawyers and
bankers is that it reflects a political response to critical comments by America’s new
administration. The more worrying interpretation is that, even as China publicly urges
other countries to commit to opening their markets to Chinese investment and trade, it
is imposing yet another barrier to outsiders. Worse still, the barriers are in its domestic
consumer sector, one of the few global economic bright spots.

Adding irony to the decision, it comes just as the Chinese government is actively
encouraging consolidation and greater market concentration in several areas,
including steel, cars and airlines, and just after it imposed a new oligopoly in
telecoms. No domestic Chinese transactions have fallen foul of the new monopoly
law.

Signs that foreign companies might be the primary targets of the law began to emerge
in November, when a merger between two brewers, America’s Anheuser-Busch and
Belgium’s InBev, was endorsed by Chinese regulators only on the condition that the
combined firm’s existing interest in several domestic breweries be frozen. In
particular, Anheuser-Busch’s non-controlling 27% stake in Tsingtao, a leading
Chinese brewer, was largely liquidated in January after what is presumed to be
pressure from the government.

The Coca-Cola Company holds around half of the domestic Chinese market for
carbonated beverages, but the juice business is highly fragmented. Together, the two
firms would control slightly more than 20% of the juice business. In a brief statement,
China’s ministry of commerce said Coke’s “dominant status” might imperil small
competitors and force consumers to face higher prices and less choice.

After the decision was announced, investment banks were left wondering, in the
words of one employee, whether “a key plank in their business had just blown up.”
Coke has spent years developing its presence in China, and has invested heavily,
presumably making it one of the world’s more acceptable buyers. It is also one of the
few companies able to finance a big deal in today’s difficult circumstances. If Coke
was not acceptable to the Chinese authorities, then who would be? The rejection will
inevitably be used as evidence of non-reciprocity, and of the collusion between the
country’s state and private sectors, by anyone opposed to China’s recent efforts to buy
companies abroad.

Furthermore, another new law comes into effect on May 1st, subjecting any transfer
of a state-controlled asset to yet another layer of review, this time by a local
commission. Theoretically this is not aimed at any particular kind of acquirer, and
would not block well-conceived deals, but that, of course, was said about the
monopoly law as well. The new law had not received much attention. It will now.
http://www.economist.com/business/displaystory.cfm?story_id=13315056

Coca-Cola in China

Squeezed out
Mar 18th 2009 | HONG KONG

From The Economist print edition

China indicates the real targets of its anti-monopoly

law: outsiders

LAST August, after 14 years of debate, the Chinese government at last imposed what
was informally referred to as its “economic constitution”, a broad anti-monopoly law
for a country rife with state-imposed monopolies. In the subsequent months, people
have wondered how the law would be applied, and whether it would advance China’s
transformation into a market economy, or serve as an impediment to genuine
competition. On Wednesday March 18th an answer emerged with the rejection of the
largest outright acquisition by a foreign company, a $2.4 billion offer by Coca-Cola
for China Huiyuan, the country’s largest juice company.

When the deal was announced last September, it was at a price three times Huiyuan’s
valuation at the time. Since then, as global markets have collapsed, it has only become
more appealing. Huiyuan is a private company and juice had previously been free of
government control, so theoretically it should have been available for purchase. “It is
a very unfortunate outcome in an industry that has no economic or national-security
significance,” says Lester Ross of WilmerHale, a law firm, in Beijing.

The most benign interpretation of the rejection being bandied about by lawyers and
bankers is that it reflects a political response to critical comments by America’s new
administration—a warning, of sorts, that could dissipate quickly if the economic
relationship between China and America can find a firm footing. The more dire
interpretation is that even as China publicly urges other countries to commit to
opening their markets to Chinese investment and trade, it is imposing yet another
barrier to outsiders. Worse still, the barriers are in its domestic consumer sector, one
of the rare global economic bright spots.

Adding irony to the decision, it comes just as the Chinese government is indicating
that it is actively encouraging, if not forcing, consolidation and greater market
concentration in a number of areas, including steel, cars and airlines, and just after it
imposed a new oligopoly in telecommunications. No domestic Chinese transaction
has fallen foul of the new monopoly law.

Signs that foreign companies might be the primary targets of the law began to emerge
in November, when a merger between two brewers, America’s Anheuser-Busch and
Belgium’s InBev, was endorsed by Chinese regulators only on the condition that the
combined firm’s existing interest in several domestic breweries be frozen. In
particular, Anheuser-Busch’s non-controlling 27% stake in Tsingtao, a leading
Chinese brewer, was largely liquidated in January after what is presumed to be
pressure from the government.

The Coca-Cola Company holds as much as half of the domestic Chinese market for
carbonated beverages, but the juice business is highly fragmented. Estimates are not
particularly reliable, but various accounts suggest the two companies would control
more than of 20% of the juice business. In a brief statement, China’s ministry of
commerce said Coke’s “dominant status” might “imperil” small competitors and force
consumers to face higher prices and less choice.

After the decision was announced, investment banks were left wondering, in the
words of one employee, whether “a key plank in their business had just blown up.”
Coke has spent years developing its presence in China, and has invested heavily,
presumably making it one of the world’s more acceptable buyers. It is also one of the
few companies able to finance a big deal in today’s difficult circumstances. If Coke
was not acceptable to the Chinese authorities, then who is? The rejection will
inevitably be used as evidence of non-reciprocity, and the collusion between the
country’s state and private sectors, by anyone opposed to China’s recent efforts to buy
companies abroad.

Deepening the gloom, another new Chinese law comes into effect on May 1st,
subjecting any transfer of a state-controlled asset to yet another layer of review, this
time by a local commission. Theoretically this is not aimed at any particular kind of
acquirer, and would not block well-conceived deals, but that, of course, was said
about the monopoly law as well. The new law had not received much attention. It will
now.
http://www.economist.com/business/displaystory.cfm?story_id=13184847

European energy

Power games
Feb 26th 2009 | PARIS

From The Economist print edition

The final shape of the European energy market is

emerging: an oligopoly

AFTER years of legal fights, hurt pride and face-saving compromises, the saga of
Endesa, a Spanish utility, and Enel, an Italian energy giant, came to an end on
February 20th. It had started when the Spanish government tried to engineer a merger
of Endesa with another Spanish utility, Gas Natural, in an effort to create a national
champion. The eventual outcome, however, is that Endesa is now owned by Enel,
Italy’s leading energy firm. One lesson is clear: attempts by politicians to create
energy champions can have unexpected consequences, and can make the governments
in question look foolish.

In 2005-06 Endesa fought off the Spanish government’s clumsy attempt to merge it
with Gas Natural. Sensing an opportunity, E.ON, a German energy giant, made a bid
for Endesa in 2006. Spain did everything it could to fend off E.ON, prompting the
European Commission to intervene. In the end Enel won Endesa by bringing in a
Spanish partner, Acciona, to appease local feelings. Remarkably, Enel, which had
bought 67% of Endesa’s shares, allowed Acciona to keep voting control of the
Spanish company. This compromise proved disastrous: the two firms fought over
strategy and Endesa suffered from a lack of direction. This week Enel finally took
proper control of Endesa by buying out Acciona’s 25% stake for €11.1 billion ($14
billion).

The Spanish complain that, whereas the government privatised Endesa in 1997-98
with the aim of improving efficiency and reducing electricity prices, the firm has now
fallen back into government hands—Enel is 31.2% owned by the Italian state. Xavier
Vives of IESE Business School doubts whether there can be a fair market for
corporate control when some European governments keep stakes in energy firms and
others do not. The Spanish failed to create a national champion, with the result that
another country’s champion has become far more powerful in the European market.
“The Spanish are justified in feeling miffed,” says Dieter Helm, an energy economist
at the University of Oxford.

Another issue is the separation or “unbundling” of energy-production and

transmission. Some countries, such as Spain, the Netherlands and Britain, have gone
further than others, such as France and Germany, in unbundling their energy
companies. The unbundlers think it is unfair for vertically integrated firms with
superior firepower to come in and snap up smaller, unbundled companies. Last
October the European Commission inserted a new “level playing field” clause into its
draft energy-liberalisation package, the final version of which will be adopted this
year, to allow countries that have fully unbundled to block acquisitions by more
vertically integrated companies. The European Union’s energy commissioner, Andris
Piebalgs, commented that the Spanish government could have used such a clause to
justify blocking E.ON’s bid for Endesa, though he added that the courts might not
have accepted the argument (E.ON agreed to unbundle its transmission operations
some time after it made its bid for Endesa).

There was another big European energy takeover this week. Vattenfall, the largest
utility in the Nordic region, bought the production and supply unit of Nuon, a Dutch
energy firm, for €8.5 billion. And there have been other recent deals. In January
RWE, a German giant, agreed to buy another Dutch firm, Essent, for €9.3 billion.
This month the Spanish government also waved through the merger of Gas Natural
with Union Fenosa, which will create a smallish national champion. With these deals,
analysts say, the consolidation among European energy firms triggered by the
liberalisation of the industry is drawing to a close. Apart from Scottish and Southern
and Centrica, two British firms, there are few targets left.

What will the result look like? After several years of frenetic mergers and
acquisitions, Europe is dominated by a few cross-border giants, such as France’s
EDF, which is 85% owned by the French state, Germany’s E.ON and RWE, and Enel.
Some countries have powerful national champions; others, such as Spain and the
Netherlands, do not. Competition within markets may be largely unaffected—from a
national point of view, two foreign utilities buying Essent and Nuon is better than the
two Dutch firms merging, as they planned to not long ago—but at a European level,
consolidation and concentration may be pushing energy prices higher, analysts say.
“We’ve got an oligopolist electricity and gas market which looks a lot like the oil
market—not at all what was intended,” says Mr Helm.