In the Spotlight – Danone stake sale to Huiyuan Juice Group
Danone said the deal values Huiyuan at HK$6.00 per share
Shares in Huiyuan Juice Group rose by 8% on Thursday (29 July) – the most in almost two months – after Groupe Danone agreed to sell its stake in the firm to Hong-Kong-based private equity firm SAIF Partners.
The French drinks and dairy giant said it was ceding its 22.98% share in the Chinese juice group to concentrate on natural mineral and spring water.
As a result, Huiyuan's shares were up by 7.9% to HK$5.85 (US$0.73) - the biggest gain since 8 June.
The deal values Huiyuan, which has around a 40% share of China's juice market, at almost half the price Danone agreed to sell the stake to The Coca-Cola Co for in 2008 before the transaction was blocked by the Chinese government on anti-trust grounds.
Oddo analyst Pierre Tegner told Reuters: “This is good news that the French company found a buyer even if it is two times less than what it would have obtained from Coca-Cola.”
The deal would have been the Atlanta-based company's second-biggest acquisition ever. But the value of Danone’s stake has fallen sharply since the Chinese government blocked Coca-Cola from taking over the country’s largest privately-owned juice producer.
Fulbright Securities analyst Francis Lun Sheung-nim told China’s The Standard: "Since the deal between Huiyuan and Coca-Cola was struck down last year, Danone believed Huiyuan is no longer attractive to foreign investors. Cashing out is a reasonable move. The [share price] boost today was helped by the favourable premium.”
Nonetheless, SAIF Partners' managing partner, Andrew Yan, said on Thursday that the private-equity firm sees Huiyuan as a long-term investment and that the fund will not rule out raising its stake when the opportunity arises.
Louis Tse, an analyst at Value Convergence CEF, told the Wall Street Journal that the sale seems to be positive for Huiyuan as Danone's stake disposal appears to be largely related to its own strategy rather than Huiyuan's business outlook.
Indeed, in a statement on Wednesday, Danone said it will now concentrate on its four core businesses in China of selling dairy products, bottled water, baby food and medical nutrition products.
But, while Danone has around 20 factories and 9,000 employees in China, it has faced a number of obstacles in the country.
Last year the firm announced that it would quit its troubled joint venture with Wahaha, China’s leading soft-drinks producer. The move ended a long-running and high-profile commercial dispute that went as far as to spark political tensions between Paris and Beijing.
Danone also made investments with Warburg Pincus in Huiyuan months ahead of its Hong Kong listing in February 2007. However, after the failure of the Coca-Cola deal, Warburg Pincus sold its stake into the public market last year, according to the FT.
But while Danone has vowed to avoid joint ventures in China after it sold its stake in Wahaha Group in 2009, analysts believe there may be future acquisition opportunities for Huiyuan.
“We expect renewed market talks of M&As for Huiyuan,” UBS product manager Herman Chan told Bloomberg.
Huiyuan’s stock “is likely to enjoy a boost in the near term,” he added.
Indeed, Huiyuan chairman Zhu Xinli, told reporters on Thursday that the company is seeking domestic M&A opportunities to consolidate the fragmented beverage market in China amid rising competition.
The firm competes for beverage sales against the likes of Coca-Cola and PepsiCo, who are boosting spending in China to expand beyond soft drinks.
"The cooperation could be through ways of issuing shares to potential partners or setting up joint ventures with major Chinese corporations," said Zhu, who founded the company. While he noted that the company is not currently in talks with any parties on tie-ups, Zhu added that Huiyuan's focus will remain on organic growth.
However, Value Convergence CEF's Tse suggests investors hang back on purchasing shares just yet.
“I won't suggest chasing Huiyuan's shares at the current level, as they may succumb to profit-taking in the near term after their current sharp rise,” he said.
Yuanta Research analyst Charles Yan told the Wall Street Journal that he also sees limited upside for Huiyuan's shares at the present time, with the latest deal having no material impact on the company's operations.
“We remain concerned that its newly-launched juice drink products will not be able to succeed in the extremely competitive China beverage market,” Yan said.
Despite this, analysts do not appear to expect the sale to have much, if any, effect on Huiyuan's operations or profitability.
Linus Yip Sheung-chi of First Shanghai Securities told China's The Standard that investors believe SAIF will have better strategies than Danone and that they feel "more confident" with the private equity firm.
Shares in Huiyuan continued to climb by close of Hong Kong trading today, reaching HK5.97, up 2.40% or HK0.14.
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