labels: Mining, Soft drinks, Coca Cola
China's knockout punch to Coke may floor Chinalco in Australia news
20 March 2009

China's knockout to Coca Cola's acquisition of its largest juice company, Huiyuan Juice may floor Chinalco's chances of acquiring key assets and raising its stake in Rio Tinto in Australia. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent)

Detractors of the Rio Tinto-Chinalco deal, ranging from shareholders, Australian political parties, arch rival BHP Billiton and commentators, received a boost after China rejected Coca Cola's $2.4-billion acquisition bid of Beijing-based Chinese juice maker Huiyuan Juice on Wednesday. (See: China trips Coke on Huiyuan Juice acquisition

The decision by the Chinese anti-trust authorities rejecting Coca Cola's deal surprisedall those who were closely following the case as they thought that the Chinese government would clear the proposed takeover as it did not involve a strategic asset.

Rejecting the first big case under the antitrust law, subjected Beijing to criticisms of protectionism, especially for a company whose worth is only $2.5 billion and Coke had made a generous offer and later sweetened the deal by saying it would invest a further $2 billion in China. (See: Cola war heats up in China with Coca-Cola's new $2-billion investment plans)

On the same day that China rejected Coca Cola deal, the Australian Senate said it would examine whether foreign investment and proposals from state-owned entities to invest in Australian companies were in Australia's national interest after Senators opposed to the Chinalco deal, moved a motion for an inquiry.

The Senate recommendations will be forwarded to the Foreign Investment Review Board (FIRB) by 17 June, where it can opt to accept it and act on it or ignore it totally.

The FIRB in turn will send its own recommendations to Treasurer Wayne Swan, who will finally okay or reject the deal. FIRB said early this week that it has extended its review of the deal by 90 days and if necessary, may prolong it further by another 60 days.

The Australian National Party senator Barnaby Joyce, who is in the forefront leading the campaign against Chinalco, has seen the Chinese rejection of the Coca Cola deal as a windfall to boost his campaign saying it signals that China is willing to protect its industry but expects Australia to allow China to buy its strategic assets.

Joyce has released an advertisement on Australian TV, where he says in the commercial, "The Australian government would never be allowed to buy a mine in China, so why would we allow the Chinese government to buy and control a key strategic asset in our country? Stop the Rudd government from selling Australia.''

He also told parliament on Wednesday that there was immense concern in Australia as to why Australia should have a sovereign nation as the owner of a sovereign asset in our country.

Another independent Australian Senator, Nick Xenophon, is also making a commercial against the deal. Speaking on Australian radio he said, "I think we should be selling the milk, not the cow, and in this case, the minerals, not the mine."

The Australian Greens party has also expressed its opposition to the deal, (See: Greens see red in Rio Tinto-Chinalco deal)  but their opposition to the deal was on the grounds of China's poor human rights records, mainly in Tibet.

Under the DLC structure the British and Australian arms retain separate legal identities but are treated as if they are one combined entity, with the shareholders of both companies having a common economic interest in all the assets. Its major shareholders have voiced their opposition to the deal. (See: Rio Tinto shareholders continue to oppose Chinalco deal)

Their main focus of concern is that Rio proposes to sell off significant slabs off its prime assets at the bottom of the cycle to pay for the acquisition of lower quality assets, and is doing so at prices that are much lower than would have been possible only months earlier, resulting in value leakage.

For that reason, rather than the principle of pre-emption rights, many investors also favour a rights issue by Rio, and further asset sales, rather than the proposed Chinalco deal as it would give the Chinese group much greater influence over Rio than implied by the percentage holding in Rio.

To make matters worse, Rio said this week that it can meet its debt payments without a capital injection from Chinalco.

Its arch rival, BHP Billiton meanwhile is sharpening its knives. Although it has a strong balance sheet and strong cash flow, it has raised $3.25 billion ($4.8 billion) in the US bond market for general corporate purposes.

This has led to rumours in the Australian market that it was planning a big acquisition.

The Chinese ministry of commerce said it had ruled against Coca-Cola's $2.4-billion acquisition of Huiyuan as the deal would unduly restrict competition although Beijing issued rules in 2006 that bar foreign ownership of companies in power generation, weapons and other industries, but fruit juice makers are nowhere in the play of their rules.

Coco Cola issued a statement after the rejection of the deal saying that the company had made a "very comprehensive submission" to the ministry of commerce expressing its view that "there were no significant competition issues," and proposed solutions to issues raised by the ministry. "Despite all this the ministry of commerce has decided not to approve our application."

Anti-trust lawyers have opined that the Chinese rejection of the Coca Cola deal was dubious and it will hamper future investments by China overseas.

They even say that in the Coca Cola deal, all the majority shareholders of Huiyuan Juice Co although holding as much as 35 per cent, had approved the deal while most of the majority shareholders of Rio Tinto are vehemently opposed to the Chinalco deal.

So even if the Australian government passes the Chinalco bid, the shareholders of Rio Tinto will still have to vote for or against the deal.

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China's knockout punch to Coke may floor Chinalco in Australia