08 Apr 2009

Juice and coke do not mix: Chinese Ministry blocks Coca-Cola's Chinese juice acquisition

by Michael Corrigan, David Ball

The Chinese Ministry of Commerce has recently disallowed, on competition grounds, the proposed acquisition of China's leading fruit juice company by Coca-Cola. This decision illustrates the importance of competition law principles in China following the commencement of the Chinese anti-monopoly law on 1 August 2008.

On 18 March 2009 the Chinese Ministry of Commerce announced a decision prohibiting Coca-Cola from acquiring Huiyuan Fruit Juice Limited, China's leading fruit juice company.

This is the first time that the Ministry has prohibited a proposed acquisition (whether by a foreign company or by a Chinese company) under the new Chinese anti-monopoly law (AML) that came into effect on 1 August 2008.

Significantly, Coca-Cola already has a very substantial presence in China via its range of carbonated soft drink products. The Ministry's decision does not affect Coca-Cola's ability to continue to invest in those products in China, or even to launch its own brands of juice in China in competition with Huiyuan juice.

In announcing its decision, the Ministry stated that "if the acquisition of Huiyuan went into effect, Coca-Cola is very likely to take a dominating position in the domestic market and the consumers may have to accept the high price fixed by the company as they don’t have more choices".

In particular, it appears that the Ministry was concerned that Coca-Cola might be able to require sellers of Coca-Cola products in China to also sell Huiyuan juice drinks, or to impose other restrictive conditions that linked Huiyuan products to Coca-Cola products, in a manner which will have an adverse impact on the market or markets for juice in China.

The Ministry's decision has very close parallels with the ACCC's 2003 decision to oppose the acquisition of Berri Limited by Coca-Cola Amatil, the Australian Coca-Cola bottler and partly-owned affiliate of The Coca-Cola Company. In that case, the ACCC's conclusions were that:

  • Coca-Cola would have several means by which it could bundle, tie or otherwise link sales of Berri products to Coca-Cola's leading portfolio of carbonated soft drink products, in particular to its "must stock" Coca-Cola products
  • there would be significantly cost savings and efficiencies arising from this merger, both for Coca-Cola and its non-grocery retailers including reduced logistics costs, which would increase the incentive for bundling to occur; and
  • it was likely that, as a result of such bundling, a number of competitors would be likely to exit the fruit juice and fruit drink market, as those competitors would be faced with reduced revenues and increased unit costs post-merger.

In the Berri case, the ACCC rejected various "behavioral" remedies proposed by Coca-Cola Amatil, on the basis that these could not fully address the long-term competition harm arising from the proposed transaction.

In particular:

  • it would be difficult to frame the undertakings so that they captured all potential conduct that would have the effect of linking Berri's fruit juice products to Coca-Cola soft drink products; and
  • behavioural undertakings could not adequately address the incentive for retailers to themselves seek to acquire fruit juice and carbonated soft drink products from Coca-Cola on a bundled basis.

It is not clear whether Coca-Cola proposed similar undertakings to the Chinese Ministry of Commerce in that Huiyuan case. However, it appears unlikely that behavioural undertakings of this kind would have been sufficient to satisfy the Ministry's concerns.

The Ministry of Commerce's decision shows it will give careful consideration to competition issues arising from merger proposals under the AML, and will be willing to block any such proposals where significant competition concerns arise.

These issues therefore need to be considered by all firms that may wish to acquire control over Chinese businesses in the future (whether by acquisition of shares, assets or otherwise).

[Clayton Utz' competition team advised Coca-Cola Amatil in respect of the Berri proposal]

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.