How China's rejection of Coca-Cola's bid to buy a Chinese juice giant will chill future acquisitions

The March 18 rejection of Coca-Cola Co.’s estimated $2.4 billion bid to buy Chinese juice giant China Huiyuan Juice Group Ltd. by the People’s Republic of China’s Ministry of Commerce is the first significant test of China’s Anti-Monopoly law, which took effect on Aug. 1, 2008.

In a statement, China’s commerce ministry announced that the agency has unconditionally approved 23 out of 24 other mergers it has reviewed since the law took effect. The one case it imposed conditions on was also a high-profile deal. Belgian brewer InBev’s $60.4 billion acquisition of Anheuser-Busch Cos. Inc. last year required Chinese ministry approval because Anheuser-Busch had a minority interest in a Chinese beer manufacturer.

John Taladay, a partner in the government antitrust practice of Washington-based Howrey, has first-hand knowledge of the Chinese commerce ministry’s efforts to absorb antitrust best practices. Taladay was part of an American Bar Association task force that provided a three-day training session on merger analysis to the agency. Howrey was also Anheuser-Busch’s antitrust counsel for the InBev deal.

Taladay spoke with The National Law Journal about the Chinese ministry’s decision and its impact on future cross-border mergers and acquisitions deals involving China and other countries.

NLJ: What is the likely impact of China’s rejection of Coca-Cola’s bid to acquire Huiyuan?

JT: This is bound to have a chilling effect on U.S. and other foreign companies trying to make acquisitions in China. One has to look at the reasons for the rejection and think about whether, judging those under international best practice standards, they stack up. Here’s there’s a clear indication that the reasons for doing this don’t meet with international best practices.

NLJ: Which of the Chinese government’s stated reasons are least in line with those best practices?

JT: They were worried Coca-Cola would use its dominance in soft drinks to leverage other segments in the juice market. That’s the kind of concern an agency would normally monitor after the merger and not use as a basis for rejecting the merger. That’s typically not used as an acceptable basis for rejecting a merger outright. The first thing you look for [in a merger analysis] would be a significant increase in market concentration. That seems to be absent from the transaction and from their analysis. As a second example, they also based this decision on the potential impact on small- and medium-sized juice companies and the ability of those companies to survive. In better-developed competition systems, the focus is always on consumers and not competitors.

The other thing, I would mention is the Anti-monopoly Bureau within the Ministry of Commerce is not a fully independent agency like you would see in many other fully-developed jurisdictions like the U.S. and the European Union. They are not immune to political pressure. Anyone looking at this result would have to wonder if it isn’t payback for resistance [that[ the Chinese National Offshore Oil Company Ltd. (CNOOC) faced when it tried to acquire the American company Unocal Oil Co. [which is now part of Chevron Corp.] in 2005. That ran into some pretty significant political backlash in the U.S. As a result of that heat, CNOOC backed out. You’d have to wonder if this isn’t China giving it back to the U.S. for the heat they took on the CNOOC proposed deal.

NLJ: The ministry announced that 23 of its 24 completed reviews have sailed through without conditions. Does this indicate that the agency takes a favorable view of proposed mergers involving smaller, lower-profile Chinese or international companies?

JT: The only other high-profile deal was InBev’s acquisition of Anheuser-Busch. They approved it and the Anti-Monopoly Bureau imposed the conditions, but the conditions have almost nothing to do with normal competition policy principals. I would not put a lot of weight on these approvals except to say that if there are transactions that have no conceivable competitive effect, then the ministry will not be able to use the competition law as a crutch to interfere with those deals.

NLJ: What was unusual about the conditions for the InBev/Anheuser-Busch deal?

JT: One, for example, involved prohibitions on InBev’s acquisition of additional shares of certain Chinese beer companies. They were conditions designed to prevent InBev from doing things that would not been seen to have any material impact on competition. They’re saying to InBev, “You can play in our market, but we’re going to watch your every move.” In the Coca-Cola proposed deal, they were saying to Coca-Cola, “We don’t want you acquiring any major companies in our market.”

NLJ: Does Coca-Cola have any recourse?

JT: It’s over. This is not an appealable decision. Coca-cola has withdrawn its bid. Yet it’s clear from the information released by the ministry that Coca-Cola [responded to the ministry's initial concerns and] offered up conditions in order to modify the deal. [The decision is] hard to understand because if there were issues that [the ministry] was concerned about, why [were] the commitments by Coca-Cola rejected? The kinds of issues they raised in blocking the deal are also the kinds of issues that could be addressed by commitments. The one exception is that if China didn’t want Coca-Cola acquiring a major brand, that is something that couldn’t be dealt with by commitments.

NLJ: In general, how does China’s stated Anti-Monopoly Law differ from U.S. antitrust law?

JT: There are two provisions that differ from U.S. law as well as from international best practice. The first is that the law requires the ministry to consider the effect of the transaction on other relevant undertakings, which means other companies. International best practice would say you should look out for consumer welfare, not for the welfare of other competitors. The second factor that is built into their statute is an analysis of the effect of the deal on the development of the international economy. The problem is that no one knows that that means, and as applied, it could mean anything the ministry wants it to. It gives them a blank check for opposing any transaction for any reasons they can muster as not being advantageous to the development of the international economy.

NLJ: Could this impact M&A dealmaking that doesn’t involve China?

JT: At an Organisation for Economic Co-operation and Development meeting in February at its Paris headquarters there was a session on how the downfall of the global economy is impacting competition and how competition is impacted by economic times. You could tell that there was a groundswell of support for protectionist policy and nationalist sentiment and a desire to protect domestic industry over foreign industry. This is true not only in China, [it's true] in Europe and in some quarters of the U.S. and everywhere else in the world. It’s very clear that if that protectionism is allowed to trump economic concern, you’re going to see a great deal of difficulty for international transactions gaining approval. But I can also tell you the competition authorities are dead set against allowing that to happen. It’s the political machinery that’s allowing that to happen. This decision involving Coca-Cola could well have broader impacts. It could encourage other jurisdictions to take a more [protectionist] approach, which could have a devastating consequence.