China Law Blog

The South China Post did a story today on China's having used its antitrust law to block Coke's purchase of Huiyuan. The article is entitled, "China raises chills as Coke bid bottled up," and it talks about whether the blocking of this deal will signal the death of foreign private equity investments in China.

My view is that it absolutely positively will not. In fact, a private equity company contacted me today regarding its desire to purchase a relatively small Chinese niche food company. They asked whether I thought the Coke deal would have any impact on their purchase and I predicted it would not. I told them I thought the company it was seeking to buy was way too regionalized, way too small, and way too insignificant in China's grand scheme of things for their to be any linkage at all with Coke's failed deal.

The South China Post hints otherwise, but I attribute that to same-day overreaction:

The article makes the requisite mention of how "US private equity firm Carlyle Group" was unable to buy a controlling stake in tractor parts maker Xugong "after three years of bureaucratic hold-ups" after "Chinese media raised eyebrows abroad by claiming repeatedly that Xugong was a 'strategic' national business." It then quotes Tang Hao of H&J Vanguard Consulting Group saying foreign investors had thought juice was "not a sector that involved economic or national security issues."

CLB's own Steve Dickinson is then extensively quoted:

Steve Dickinson, a partner at US law firm Harris Moure who has advised foreign investors in China since 1979, said the deal provided false hopes Beijing was opening up to foreign buyers.

"After the decision, I think leveraged buyout funds that have set up in Hong Kong will go home," he said.

International buyout funds with local offices include US giant Blackstone Group and Europe's largest buyout house, Permira, as well as Carlyle. Blackstone posted a US$1.33 billion loss last year.

"It's anyone's guess whether those large funds will stay [in China] or, given the problems back home, just focus on the US and Europe," said Simon Littlewood, the chief executive of venture capital firm London Asia Capital.

* * * *

Some foreign investors may treat the Coca-Cola setback as a one-off decision. "It may be that lawyers realise after analysing the decision that, in substance, there is a very meaningful market share Coke could gain," the China head of a western buyout house said.

Andrew Pawley, a corporate finance director at accountancy Baker Tilly, added: "No one talks about abandoning the US if a takeover fails there."

And foreign private equity firms have been increasing investment on the mainland, with deal values rising from US$2.7 billion in 2007 to US$5.04 billion last year, according to Dealogic.

However, Mr Dickinson cautioned these were mostly small investments in obscure companies.

"China, fundamentally, 100 per cent discourages foreigners from entering the market and there are only three conditions China will permit," he said. "Either the company is too small for the government to care about, or it is troubled and the foreign purchaser has agreed to improve the business, or the foreign company takes a minority stake and there is a transfer of technology or expertise or access to foreign markets.

"If you don't fit into one of these three categories you can't do mergers or acquisitions in China and that's the end of it."

Enough with the death knell pronouncements. Foreign private equity investments in China is not going to die, but it will need to modify. Wise foreign private equity firms are going to need to focus on the types of deals that have a real potential to work in China. China will accept the following sorts of foreign deals:

-- Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.

-- Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.

-- Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.

Additionally, foreign private equity firms remain free to invest in foreign companies that are in China already as a Wholly Foreign Owned Entity (WFOE) or a Joint Venture (JV) or to invest in those foreign companies planning to go into China in some way other than by purchasing a large financially viable Chinese company.

For more on China's denial of Coke's purchase of Huiyuan, check out the post we did earlier today on this same topic, "China Rejects Coke Deal. We Told You All This Long Ago."

UPDATE: in a post entitled, "Coke, Huiyuan and the audiences that matter," ImageThief does a great job explaining the public relations aspect of this and any other large foreign deal in China. Its summation: "So here it is in plain language: If you're a large foreign firm taking over a Chinese firm, prepare to be flogged in public. And prepare for it before you announce your acquisition." True.