VZCZCXRO3290
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0702/01 0772259
ZNR UUUUU ZZH
O 182259Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2941
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 3508
RUEHFR/AMEMBASSY PARIS IMMEDIATE 4515
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 1125
RUEHGP/AMEMBASSY SINGAPORE IMMEDIATE 9608
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 2470
RUEAWJA/DEPT OF JUSTICE WASHDC IMMEDIATE
RUEHGV/USMISSION GENEVA IMMEDIATE 2414
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEHBS/USEU BRUSSELS IMMEDIATE
RUEHRC/DEPT OF AGRICULTURE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 03 BEIJING 000702 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM -- FLATT 
STATE FOR EEB/OIA -- SCHOLZ, TRACTON, HICKS, YAJNIK 
STATE FOR E -- YON 
STATE FOR D -- PARK 
STATE FOR L -- CAPLAN 
STATE PASS USTR FOR STRATFORD, WINTER, BAHAR, KALLMER 
STATE PASS FTC FOR KALLAY, TRITELL, DAMTOFT 
NSC FOR LOI 
DOJ FOR CHEMTOB 
TREASURY FOR RESNICK AND SAMPLINER 
COMMERCE FOR BRZYTWA AND ARONOFF 
PARIS PASS OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EAID ETRD WTRO PREL CH
SUBJECT: COCA-COLA,S BID FOR JUICEMAKER HUIYUAN BEATEN TO A 
PULP 
 
REF: 2008 BEIJING 3775 
 
Summary 
------- 
 
¶1. (SBU) China,s Ministry of Commerce (MOFCOM) announced 
March 18 that it would not permit Coca-Cola,s proposed $2.4 
billion acquisition of Huiyuan, China,s largest fruit juice 
maker.  In its short public announcement on the rejection, 
MOFCOM cites concerns that Coca-Cola would be able to use its 
dominant position in the carbonated beverage market to compel 
distributors and retailers to carry the market-leading 
Huiyuan brand of juices.  MOFCOM also expressed concern about 
the effect of the combination on China,s small and 
medium-sized enterprises (SMEs) that compete with Coca-Cola 
and Huiyuan.  The process that drove MOFCOM to its conclusion 
and its rejection of the deal both highlight the challenges 
that foreign investors often face in China.  These include 
lack of transparency; China,s arbitrary casting aside of its 
foreign investment catalogue, which lists fruit drinks in the 
&encouraged8 category; the influence of competitors on 
China,s administrative decisions; and the fact that China,s 
Anti-Monopoly Law (AML) serves to promote China,s economic 
development as much as competition.  China,s rejection of 
the deal illustrates challenges the U.S. should seek to 
address in ongoing negotiations with China over a bilateral 
investment treaty.  Coca-Cola reiterated its request that the 
United States not raise the case with China. 
 
The Proposed Deal 
----------------- 
 
¶2. (SBU) In September 2008, Coca-Cola reached agreement with 
Huiyuan,s four largest shareholders ) the company,s 
Chinese founder, French beverage group Danone, Warburg 
Pincus, and Fidelity ) which collectively control 70% of 
Huiyuan,s stock.  The other 30% of Huiyuan,s shares are 
listed on the Hong Kong stock exchange.  The proposed 
transaction price represented a 200% premium to the firm,s 
market value.  The contract was dependent upon China 
approving the transaction within 200 days, a deadline which 
could be extended if all parties to the transaction agreed. 
(Note:  AML implementing regulations allow China 30 days to 
review transactions, plus 150 days to conduct more intensive 
reviews, if needed.  End Note.)  Coke had never before 
acquired a firm of Huiyuan,s size in China. 
 
¶3. (SBU) Coca-Cola was initially cautiously optimistic that 
China would approve the deal, as reported reftel, which most 
Western competition experts believed posed few competitive 
problems.  Fruit juice drinks are listed in the encouraged 
section of China,s Guidance Catalogue for Foreign 
Investment.  At the same time, Coca-Cola China Government 
Affairs Director Christina Lau told Econ Minister Counselor 
(M/C) in a March 18 meeting that well-connected Chinese 
academics had expressed skepticism that the deal would be 
approved. 
 
Coca-Cola Lacked Access 
----------------------- 
 
¶3. (SBU) Lau told Econoffs Coca-Cola did not lobby 
aggressively for approval of the deal.  Coke,s contacts with 
 
BEIJING 00000702  002 OF 003 
 
 
MOFCOM were almost exclusively at the working level, with AML 
Bureau Deputy Director Zhu Zhongliang, plus one additional 
meeting with AML Bureau Director General Shang Ming. 
Coca-Cola had sought and was unable to obtain access to Vice 
Premier Wang Qishan, Commerce Minister Chen Deming, and 
Commerce Vice Minister Ma Xiuhong.  Commerce Minister Chen 
had &fled the scene8 when Lau introduced herself at an 
Amcham event, she recalled.  Coca-Cola had made an internal 
decision to be quiet and work through official government 
channels, she added.  In addition, Coca-Cola had not 
approached MOFCOM before announcing the deal to feel out 
whether it was likely to be approved. 
 
Shocking Lack of Transparency in China,s Review of the Deal 
--------------------------------------------- -------------- 
 
¶4. (SBU) In an separate March 4 meeting with Econ M/C Luke, 
Coca-Cola Pacific Deputy President Paul Etchells said that in 
meetings with Coca-Cola, MOFCOM initially refused to describe 
its concerns about the transaction,s effects on competition. 
 Instead, MOFCOM officials said that Coca-Cola had more 
experience with anti-trust analysis than China, so Coke 
should 
&self assess8 the deal and propose mitigating solutions. 
 
¶5. (SBU) Etchells also expressed frustration that Coca-Cola 
had &no visibility about what was going on8 at MOFCOM. 
MOFCOM officials repeatedly declined to update Coca-Cola on 
the deals status or confirm who was reviewing it.  He said 
there were vague references to higher-level authorities. 
(Comment:  We think it is likely given the size of the 
transaction that China,s State Council reviewed the deal. 
In addition, several other Chinese agencies have regulations 
related to foreign investment and it is not clear what role 
those agencies may have played as well.  End Comment.) 
 
¶6. (SBU) In addition, Etchells said, while Coca-Cola had 
notified MOFCOM of the proposed deal on September 18, MOFCOM 
did not start the clock for its review for many weeks, as it 
sought additional information.  In some instances, MOFCOM 
would ask for additional information without specifying what 
additional information it was seeking.  In total, through 
March 4, Coca-Cola had submitted written information 12 times 
and had 18 further interactions with MOFCOM, he said. 
Coca-Cola said MOFCOM had also sought opinions from industry 
associations and competitors. 
 
China,s Concerns Unrelated to Competition Policy 
--------------------------------------------- --- 
 
¶7. (SBU) Etchells said that Coca-Cola was able to identify 
some of MOFCOM,s concerns, although MOFCOM never explicitly 
confirmed them.  They were as follows: 
 
(A) Coke,s deal with Huiyuan included a non-compete clause 
that would have prevented Huiyuan,s founder from 
establishing or working for a competing business for two 
years.  Coke characterized the clause as a standard clause in 
merger and acquisition (M&A) transactions.  Etchells said 
this issue seemed to be among MOFCOM,s chief concerns. 
 
(B) MOFCOM was concerned that Coca-Cola was buying off 
Huiyuan in order to &kill off its brand.8  Etchells said 
 
BEIJING 00000702  003 OF 003 
 
 
that this analysis &made no sense8 since the bulk of the 
value of Huiyuan was its market-leading brand.  (Note: 
Huiyuan is a bottler.  It buys juice and packages it.  End 
Note.)  Etchells sensed that this line of reasoning reflected 
&political pressure8 on MOFCOM.  The potential sale of 
Huiyuan,s brand to a leading foreign firm like Coca-Cola 
sparked heated opposition to the deal in China,s 
&blogosphere,8 he added.  MOFCOM offered no ideas on how 
Coca-Cola could reassure it that this was not its plan. 
 
(C) MOFCOM was concerned about the effect of the deal on 
Coca-Cola,s bottlers, which include one Chinese state-owned 
enterprise (SOE), COFCO.  Etchells said MOFCOM was concerned 
that China should &give COFCO some benefit of its ownership 
in Huiyuan,8 like more distribution rights, &but was 
concerned that Coca-Cola would expect money for this.8  He 
said MOFCOM also alluded to the idea of transferring Huiyuan 
manufacturing to COFCO. 
 
(D) MOFCOM also asked Coca-Cola several times why it imports 
the juice it uses for its Chinese Minute-Maid brand juice 
drinks and suggested Coca-Cola consider using Chinese-made 
juice.  Etchells said Chinese-made juice is not as high 
quality as the Brazilian juice that Coca-Cola buys and noted 
that Huiyuan also uses imported juice in most of its products. 
 
(E) MOFCOM thought that there was a risk that Coca-Cola could 
use its 50% market position in the carbonated drinks sector 
to unfairly promote Huiyuan products through tie-ins. 
(Comment:  This concern appears to be the only one relevant 
to the Anti-Monopoly Law.  End Comment.) 
 
¶8. (SBU) MOFCOM,s press release on the deal refers to 
concerns about the effect of the deal on small and 
medium-sized Chinese enterprises and also mentions the tie-in 
concern, but none of the other issues mentioned above.  Our 
initial attempt to get additional details from MOFCOM 
regarding its analysis of the case was rebuffed.  We will 
continue to seek information as it becomes available.  We are 
sending separately by email a translation of the MOFCOM press 
release. 
 
Coke,s Next Steps 
----------------- 
 
¶9. (SBU) We are unaware of any effective appeal provisions 
for M&A reviews under China,s Anti-Monopoly Law.  In any 
case, Coca-Cola Pacific Deputy President Etchells told us 
that if MOFCOM did not approve the deal, it would effectively 
die.  Hong Kong takeover regulations would require Coca-Cola 
to wait 12 months before re-submitting a revised offer.  In 
addition, declining equity markets would lead Coca-Cola to 
seek a lower valuation in any future deal, which Huiyuan,s 
founder likely would be unwilling to accept.  That said, Coke 
Government Affairs Director Lau affirmed that Coke would not 
pull back from the China market, which is its third biggest 
after the United States and Mexico.  She added that there are 
other bidders interested in Huiyuan, some of which had 
participated in the initial auction, which Coke had won. 
PICCUTA