CHINA: Diageo cautious on Shui Jing Fang deal

Diageo has said that it remains cautious on its bid for regulatory approval to gain indirect control of Chinese drinks group Shui Jing Fang, despite reports that it has cleared a significant barrier to the deal.

Back in January, China's Sichuan Swellfun sold its remaining 40% stake in the Sichuan Quanxing distillery to fellow Chinese firm, Bright Food Group.

It is thought that the move could help Diageo in its quest for regulatory approval to gain indirect control of Sichuan Swellfun, which produces the local baiju spirit under the Shui Jing Fang name. Earlier this week, Diageo's business development director for Asia-Pacific, Jeffrey Huang, was quoted by the Financial Times as saying that the disposal of Quanxing and its namesake brand "should clear any hurdle" to a deal for Sichuan Swellfun.

However, when contacted by just-drinks today (4 March), Diageo said it remains cautious. "The investment approval application is being considered by the Ministy of Commerce," a Diageo spokesperson said. "We respect this process and await its decision.”

Foreign takeovers have proved tricky in China, as The Coca-Cola Co demonstrated when, in 2009, it failed to gain approval to buy Huiyuan Juice Group for $2.4bn.

Early last year, Diageo agreed to buy a 4% shareholding in Sichuan Chengdu Quanxing Group from Chengdu Yingsheng Investment Holding for GBP14m (US$22.7m). The move, if approved by authorities, would raise Diageo's stake in the group from 49% to 53%.

Sichuan Chengdu Quanxing Group has a 39.7% stake in Sichuan Swellfun, which owns Shui Jing Fang.

If that deal goes through, Diageo has said that Chinese law dictates that it must then offer to acquire all outstanding shares in Sichuan Swellfun. This would cost Diageo around GBP610m ($993m), it is estimated.

At Diageo's recent half-year results conference, group CEO Paul Walsh said that China's alcoholic drinks market is set to expand to a value of GBP78bn by 2013, from GBP62bn currently.