Coca-Cola to buy Huiyuan in largest China takeover

By Alison Leung and Fion Li

HONG KONG, Sept 3 (Reuters) - Coca-Cola Co (KO.N: Quote, Profile, Research, Stock Buzz), the world's leading drinks maker, agreed to pay $2.5 billion for Chinese juice maker Huiyuan (1886.HK: Quote, Profile, Research, Stock Buzz), three times its value, in China's biggest takeover by a foreign company.

Coca-Cola, which has offset flat sales at home by expanding globally, dominates a growing Chinese diluted-juice market and now hopes to make inroads into an untapped pure-juice sector.

Major acquisitions have slowed to a trickle in past years in a fragmented Chinese consumer industry as companies grapple with fierce competition and a slide in margins. Local brand names are also known to resist foreign control, analysts said.

Huiyuan, more than one-fifth-owned by France's Danone (DANO.PA: Quote, Profile, Research, Stock Buzz), controls 10.3 percent of a Chinese fruit-vegetable juice market that grew 15 percent last year to $2 billion. It's followed closely by Coca-Cola with a 9.7 percent market share.

China is already Coca-Cola's fourth-largest market and a crucial battleground with rival PepsiCo (PEP.N: Quote, Profile, Research, Stock Buzz) -- it has twice Pepsi's soft-drinks market share with 15.5 percent -- given flat North American sales in the first quarter. [ID:nN16311903]

Coca-Cola is paying a high premium for a company it hopes will strengthen its grip on the domestic juice market, and it may have plans to sell Huiyuan's drinks abroad, analysts say.

"The move is a big surprise to the market and the offer is super-generous," said Lawrence Chor, analyst at Tai Fook Securities. "It's very possible Coca-Cola will leverage the Huiyuan brand, acquire other Chinese juice makers, then boost their output for export."

PURE-JUICE EXPOSURE

Coca-Cola agreed to pay HK$12.20 a share in cash -- 43 times Huiyuan's forecast 2008 earnings and nearly three times its Friday close of HK$4.14 -- for the 16-year-old firm.

Huiyuan shares soared 170 percent on Wednesday, regaining levels last seen in October 2007.

Three shareholders, including Danone, holding a combined 66 percent in Huiyuan agreed to sell their stakes, Coca-Cola said.

Coca-Cola will now make a general offer for all shares, bonds and options in Huiyuan, and plans to take the company private.

The purchase is the single largest takeover in China, where inbound M&A is notoriously difficult given state dominance of the corporate sector and regulatory red tape. Nationalistic pride often triggers protests when foreign firms gain influence over domestic firms.

Chinese inbound corporate deals so far are up 30 percent from a year ago, to $15.3 billion, Thomson Reuters data show.

The Chinese juice market -- encompassing pure juice, diluted juices and nectars -- is expected by analysts to grow at above 10 percent in coming years alongside rising incomes, benefiting Huiyuan, Tingyi (0322.HK: Quote, Profile, Research, Stock Buzz), Uni-president (1216.TW: Quote, Profile, Research, Stock Buzz) and others.

Sales of juice in China rose 15 percent last year to 13.6 billion yuan ($1.99 billion) and sales volume rose 12.3 percent to 2.57 billion litres, based on AC Nielsen data from Huiyuan.

Coca-Cola said its own China sales rose 20 percent in volume in the first quarter and 13 percent in the second quarter.

"Coca-Cola is looking to tap the pure juice market where Huiyuan is the market leader," said Emma Liu, an analyst with Nomura Securities. "Though it's a relatively small market in the beverages space, it's a high-growth market because of the growing personal income in China and increased health awareness."

Huiyuan said it controls about 43 percent of China's pure-juice market, and expects sales to grow five-fold in 3-5 years to 10 billion yuan.

Shares in smaller competitors rallied, with Andre Juice (8259.HK: Quote, Profile, Research, Stock Buzz) jumping 11 percent as the broader market .HSI dropped 2 percent.

"Huiyuan is a long-established and successful juice brand in China and is highly complementary to the Coca-Cola China business," said Muhtar Kent, chief executive of Coca-Cola.

The deal hands a whopping profit to Huiyuan's investors.

Danone, which has about 23 percent of Huiyuan, said it had tendered its stake to Coca-Cola and expected a profit of about 100 million euros ($145 million).

U.S. private equity firm Warburg Pincus & Co also stands to make a windfall as its near-7 percent stake in Huiyuan is now worth around $175 million. The New York investment firm invested around $62.5 million in the juice maker at the time Danone took its stake in 2006.

Coca-Cola was advised on the deal by Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) and Huiyuan was advised by Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz). ($1=.6898 Euro) ($1=HK$7.807) (Additional reporting by Parvathy Ullatil, Tony Munroe, Michael Flaherty and Joseph Chaney; Writing by Edwin Chan, Editing by Ian Geoghegan)