SAIF gets juice from Huiyuan

According to reports, SAIF’s $260 million figure values the company at approximately half of Coca-Cola’s past figure. Danone is parting with its stake for HK$6 a share ($0.77), a 10% premium over its last closing price, at HK$5.43 ($0.70).

Reports suggest that Danone has wanted to offload its stake in the company since Coca-Cola’s rejected bid, and finding a buyer comes as a relief – even at half Coca-Cola’s valuation. Danone will reportedly use the capital to expand its bottled water business in China and elsewhere.

In September 2008, Coca-Cola first launched its acquisition process for Huiyuan, one of China’s biggest beverage producers. To sweeten the deal to regulators and showcase its long-term commitment to China, Coca-Cola further pledged $80 million to open an innovation center in Shanghai that was slated to employ 200 researchers.

However, in March the government rejected Coca-Cola’s bid on the grounds of anti-monopoly practice, though sources at the time suggested the government had been unwilling to support a foreign company’s takeover of such a successful and iconic Chinese enterprise. According to March 2009 reports, Huiyuan claimed a more than 10% share of the Chinese juice market while Coca-Cola has a 9.7% share in its beverage sector.

Had the deal progressed, Coca-Cola would have picked up Danone’s 23% stake in Huiyan, well as the 36% owned by Huiyuan’s founder Zhu Xinli and a 7% stake that was then held by American PE firm Warburg Pincus.

The Warburg Pincus deal had seen troubles of its own. In June 2009, AVCJ reported that Warburg Pincus, which previously held a convertible bond position in the company allowing for the 7% equity stake in the group if exercised, declined to exercise those options, letting them expire. Warburg Pincus, via the Royal Bank of Scotland, then sold its holding into the market, three years after it paid $65 million for the asset.

Private equity firms including the Blackstone Group, the Carlyle Group and TPG Capital were also reportedly considering a minority investment in Huiyuan in the wake of the collapse of Coke’s attempted takeover. However, valuation concerns prevented deals from closing.

In a statement, Andrew Yan, Managing Partner of SAIF Partners, suggested that the company will impose minimal management changes, saying, “SAIF has confidence in [Zhu Xinli’s] leadership. We believe that the entire staff, under his leadership, will strive hard to create considerable returns for shareholders.”

Yet, it is difficult to ascertain what kind of bargain SAIF got in the deal. While Huiyuan has traditionally been a leader in the juice market, one China-focused source suggested that the competition in the Mainland’s beverage sector is growing, and this could create future hurdles, as it’s still rare for consumers to choose a juice based on its brand (unlike other soft drinks). Also, powerful multi-nationals like Coca-Cola have largely broadened their product lines to include juices and bottled waters, further augmenting competition.

Using Coca-Cola’s bid price from last year as a benchmark paints a distorted picture, the source added. Because the deal never closed, and because the $2.4 billion offer occurred some time ago, it cannot be considered a market transaction with which to determine market price for the company. Instead, the price SAIF paid can only be evaluated based on Huiyuan’s current profitability and projected profitability.

“That said, Coke is a smart company and it was also bidding during the global crisis, so you’d think its bid wouldn’t be far off the mark,” the source said, adding that, while competition is growing, “so is the pie – people aren’t just drinking tea anymore.” 

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• Topics
• Greater China
• Consumer
• Expansion
• SAIF Partners
• Andrew Yan
• Warburg Pincus Asia
• The Blackstone Group
• The Carlyle Group
• TPG Capital