Comment - Diageo closing in on Shui Jing Fang
Conditions could be key for Diageo's Shui Jing Fang bid
Diageo's bid to take control of Shui Jing Fang could set an important precedent on China's drinks market.
The UK Government has signalled that it will throw some weight behind Diageo's efforts to take control of Shui Jing Fang, one of China's leading white spirits producers. There is even speculation that a deal could be announced this week.
If Diageo wins the day, analysts believe that the deal could triple the value of its operations in China overnight. However, the prospective deal also has more far-reaching implications and, if approved by country's tough Ministry of Commerce, could be a landmark case in China's attitude to foreign takeovers.
UK prime minister David Cameron and business secretary Vince Cable are meeting their Chinese Government counterparts in China this week to discuss, among other things, bilateral trade.
Diageo has been heartened by suggestions that its offer for Shui Jing Fang has been made one measure of the trip's success. "We are obviously grateful that the Government intends to make representations in support of our position," a Diageo spokesperson said in a statement today (8 November).
Yet, the Johnnie Walker distiller is clearly treading a cautious path. "The regulatory decision on this acquisition, and the timing of that decision, are completely a matter for the Chinese authorities - specifically the Ministry of Commerce - and Diageo respects that process," the group was quick to add.
The Coca-Cola Co burnt its fingers in China last year when the Ministry of Commerce rejected its US$2.4bn takeover of the country's leading juice maker, Huiyuan Juice Group. The move led some observers to accuse China of double standards by blocking foreign takeovers on its soil at the same time as encouraging Chinese firms to pursue takeovers overseas.
Where drinks companies have tied-up with local producers in China, it has tended to be in the form of joint ventures - often with the foreign entity ceding control to the domestic player. As an example, SABMiller owns 49% of its brewing venture with China Resources Enterprise, CR Snow. Asahi Breweries has a 20% stake in Tsingtao Brewery and Carlsberg is closing in on a 30% holding in Chongqing Brewery. SABMiller, in particular, is more accustomed to running the show in its tie-ups, as is Diageo.
However, there are reasons to be optimistic about Diageo's move on Shui Jing Fang. Importantly, there are differences between this case and Coca-Cola's in 2009.
Some commentators suggested last year that the Ministry of Commerce had genuine concerns about a resultant monopoly in the juice market. "You cannot say that this objection is not justified because the acquisition itself does form a large monopoly threat," Qian Weiqing, a senior partner at Dacheng Law Firm in Beijing, was quoted in the international press as saying.
Shui Jing Fang is nowhere near as dominant in white spirits as Huiyuan is in juice. Shui Jing Fang is the fourth largest super premium white spirits brand by volume in China, according to Diageo.
Diageo's case is also different from Coca-Cola's because Diageo is already on the inside track and is not seeking full control of Shui Jing Fang in one swipe.
Instead, it is seeking to gain control of Shui Jing Fang via the Chinese investment vehicle Sichuan Chengdu Quanxing Group, in which Diageo already owns a 49% stake and which is the largest shareholder in Shui Jing Fang.
Diageo's plan is to raise its stake in Quanxing to 53%, thereby making itself indirectly the largest shareholder in Shui Jing Fang. Chinese law dictates that Diageo would then have to offer to buy up all outstanding Shui Jing Fang shares.
China's Ministry of Commerce could doubtless find a reason to refuse the deal if it wanted to. But, there is a sense this time that a deal is more likely.
That said, China's Government might be unwilling to approve an agreement for nothing in return and the strings attached to any approval could be key. There are several hoops for Diageo to jump through in order to own Shui Jing Fang and these provide China with ample opportunity to lay down conditions.
We should not be too surprised that Diageo has ended its flirtation with Stock Spirits....
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