Comment - Shuijingfang: Post-Colonial Diageo

In these modern times, as the world gets smaller, Diageo would appear to be embracing the softly-softly approach of the post-colonial age.

Twenty years ago, the drinks giant would have been forgiven for steamrollering into markets like China, introducing itself loudly in English and going all out for full ownership of an asset. Of course, hindsight tells us that this sort of approach would have been given short shrift by the Chinese.

This is a theoretical lesson that has not been wasted on the likes of Diageo. When the company announced earlier today (20 March) that it will start the takeover process for the baijiu producer, Shuijingfang, in the next few weeks, it did so more because it has to than it wants to.

Last year, Diageo upped its stake in Shuijingfang's largest shareholder, Quanxing, by a further 4%. The move saw Diageo's holding in Quanxing rise from 49% to 53%, subsequently triggering a compulsory tender offer from Diageo for the 60.3% of Shuijingfang that Quanxing does not own.

The key word here is 'compulsory'. 

Diageo is offering Shuijingfang's shareholders CNY21.45 (US$3.38) per share – a price that is 17% below yesterday's closing share price. It is clear, then, that the company does not expect much uptake. And, that will suit Diageo just fine.

Like Russia, China is known as a... shall we say 'challenging' place for western multinational firms to do business. Storming in like a colonial power will get you nowhere, so keeping local interests involved in your domestic forays will smooth the path.

But, while Diageo can only lay claim to 39.7% of Shuijingfang, would the company not prefer to snare another, oh, I don't know, 10.4%?

There's no pressure: After Quanxing, the second largest shareholder in Shuijingfang holds around 1% of the white spirit producer. If the natives were to rebel, Diageo will see them coming a mile off.