Antitrust Alert: Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review
Today the Chinese Ministry of Commerce (MOFCOM) announced that it had denied antitrust approval of The Coca-Cola Company's proposed acquisition of a famous Chinese Juice manufacturer, China Huiyuan Juice Group Limited ("Huiyuan" ). MOFCOM's decision to block the Coke deal, after its conditional approval of InBev's acquisition of Anheuser-Busch in November 2008, is the second landmark decision by MOFCOM during its first eight months of enforcement of China's new Anti-Monopoly Law ("AML"). However, the reasoning behind today's decision raises questions about MOFCOM's enforcement of the new law.
Coca-Cola submitted its initial merger filing in September 2008. After several supplemental submissions, MOFCOM opened a second-stage review in December. Today's decision indicates that MOFCOM made an extensive investigation, soliciting information from other governmental authorities, trade associations, juice beverage industry competitors, suppliers, downstream sellers, and the parties, as well as legal experts, economists, and agricultural experts.
According to today's public statement, MOFCOM concluded that the transaction would have an adverse effect on competition. MOFCOM asked Coca-Cola to propose a viable solution – terms for a conditional approval, as in the Inbev/Anheuser-Busch case – to address MOFCOM's concerns. However, MOFCOM ultimately concluded that the remedies proposed by Coca-Cola were insufficient to address the adverse effects of the transaction. Although MOFCOM has not disclosed any specific proposals, the media have reported that MOFCOM sought the divesture of the famous "Huiyuan" brand, a condition that reportedly was unacceptable to Coca-Cola.
MOFCOM outlined three reasons for blocking the transaction. First, it concluded that the Huiyuan acquisition would enable Coca-Cola to leverage its dominance in the carbonated soft drinks market into the juice beverage market. Second, MOFCOM found that Coca-Cola's control over the juice beverage market would be appreciably strengthened by controlling two well-known juice brands, the "Minute Maid" brand already owned by Coca-Cola and "Huiyuan." Coupled with the leverage effect, this was viewed as raising barriers against any potential competitor seeking to enter the juice beverage market. Third, the agency determined that the transaction would squeeze out smaller juice manufacturers in China, restrain local manufacturers from participating in the juice beverage market, and diminish their innovation, which would harm competition in the Chinese juice beverage market and undermine its sustained sound development.
Although the underlying data and evidence have not been published, MOFCOM's reasoning raises several concerns.
Dominance and market definition. The MOFCOM decision proceeds on the basis that Coca-Cola has a dominant position in a Chinese soft drinks market, but does not state how it reached this conclusion. Though the AML provides for presumptions of dominance based on single-firm market shares or combined market shares of the two or three largest firms in a market, MOFCOM's announcement did not indicate whether it relied on any of these presumptions or what market share was attributed to Coca-Cola. Even if subject to such a presumption, the AML recognizes factors that may rebut such a presumption, including whether a company has the power to control pricing or competition in the relevant market. The MOFCOM statement did not include any finding that Coca-Cola has such power, a proposition that seems debatable given the presence of other competitors.
Leveraging. It is also not clear what basis MOFCOM had for concluding that Coca-Cola could leverage its position in the carbonated soft drinks market to increase its sales in the juice beverages market, whether through tying or bundling arrangements or the imposition of other restrictive conditions, leading to fewer options and higher prices for consumers. MOFCOM provided no basis for these fears in its decision, and did not state whether it had considered imposing conditions prohibiting such conduct.
The importance of brands. It appears that MOFCOM concluded that Coca-Cola's accumulation of a second famous brand – Huiyuan – in the Chinese beverage industry would have substantial exclusionary effects, even though that brand's products appear not to closely compete with those sold under the Minute Maid brand. Nevertheless, MOFCOM did not address in its decision how difficult it is for new brands to be built up over time, the history of entry and market share growth by new brands in the beverage industry in China, whether it might be possible to use well-known brands from related product areas to reduce entry barriers into the soft drink or juice markets, or what other barriers to the building of new brands exist for potential entrants.
Protection of small and mid-sized juice makers. MOFCOM's decision specifically asserts that the acquisition would negatively affect smaller juice competitors in China. In most jurisdictions, the protection of competition, rather than individual competitors, is considered the goal of antitrust law. However, Article 27 of the AML specifically permits MOFCOM to consider effects on individual competitors and other affected companies (such as suppliers or customers). Such efforts to protect small local competitors run the risk of becoming a serious – not competition-based – impediment to foreign firms seeking to acquire domestic Chinese companies.
Innovation. Surprisingly, MOFCOM also concluded that the proposed transaction would hamper innovation by domestic juice manufacturers. "Innovation market" analysis is a complex and a much-debated development in competition law, and is particularly difficult to evaluate without extensive information on research and development costs and expenditures and other related data. Thus, the reference to innovation by MOFCOM, which is still building its capacity to conduct intensive economic analysis, also may raise concern.
Burden of proof. A broader issue relates to whether the burden of proof will be properly allocated between the parties and MOFCOM during antitrust merger review. MOFCOM's adverse decision in this case suggests that it believes that neither the AML nor its recently issued draft rules and guidelines require MOFCOM to prove the likelihood of anticompetitive effects in order to reject a potential transaction. If instead MOFCOM can simply require transaction parties to disprove MOFCOM's theories of potential competitive harm – such as the leveraging theory here – then Chinese merger review may prove to be an almost insurmountable barrier for many parties, especially in the absence of detailed, rigorously obtained data on sales in the relevant product markets. Given the serious difficulty of obtaining such data in Chinese markets, that would provide MOFCOM with almost total discretion in the review process, subject to the possibility of administrative lawsuits against MOFCOM seeking to overturn its decisions, and such challenges to government agency decisions historically have typically been unsuccessful in China.
In conclusion, the MOFCOM decision blocking Coca-Cola's acquisition of Huiyuan appears to pose a daunting obstacle, especially for foreign companies with substantial market positions or strong brands seeking to make acquisitions in China, especially if the Chinese target company itself possesses a famous brand name. This decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.
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