18 March 2009, the Chinese Ministry of Commerce (MOFCOM), the authority responsible for merger control review under the Anti-monopoly Law (the AML), published its decision to block Coca-Cola’s proposed US$2.4bn acquisition of Chinese fruit juice producer Huiyuan (the Transaction). The acquisition would have been the largest buyout of a Chinese company by a foreign investor so far. Analysts had viewed the Transaction as a test case for China’s new AML, with the decision expected to act as a litmus test for China’s policy on foreign takeovers.
On its face, the published decision suggests that the transaction was prohibited on the basis of a technical antitrust assessment, although the decision does not give any detail of the evidence of anti-competitive harm on which MOFCOM based its broad conclusions. Following on from the recent decision on Inbev’s acquisition of Anheuser-Busch, MOFCOM has served notice that the AML will be a force to be taken seriously.
Review process and timing
Coca-Cola submitted the notification materials to MOFCOM on 18 September 2008. In the following procedure, the Chinese authority required additional information several times until it accepted the materials as complete on 20 November and started the clock for a phase 1 review.
On 20 December 2008, MOFCOM decided to conduct further review in phase 2, initiating a 90-day timetable. On 18 March 2009, it published the prohibition decision (the Decision) after discussions with Coca-Cola about potential conditions failed. While the issue has been the subject of some uncertainty in recent months, the Decision’s express reference to the fact that the review was completed ‘before 20 March 2009’ suggests that MOFCOM considered the review period to be measured in calendar days, rather than business days.
As to its investigations, MOFCOM indicated that it had consulted with third parties including other relevant governmental departments, industry associations, competitors and upstream suppliers.
The Decision indicates that MOFCOM blocked the merger because it would have the effect of ‘eliminating or restricting competition’ and would ‘have negative influences on effective competition in the juice market in China.’ In the Decision, it identified the following antitrust concerns:
- Leveraging of a dominant position: according to MOFCOM, Coca-Cola would have gained the ability to leverage a dominant position in the carbonated soft drinks market over the juice market. In its press statement, although not in the Decision itself, MOFCOM referred to the potential for tying, bundling or other exclusive practices that could lead to higher prices and reduced choice.
- Control over important brands: MOFCOM identified brand recognition as the key factor that impacts effective competition in the beverage industry. It saw Coca-Cola’s position in the juice market as being significantly increased through control over the juice brands ‘Minute Maid’ and ‘Huiyuan’. According to the authority’s findings, the entry barriers would have been significantly increased for potential competitors.
- Potential squeeze of domestic medium and smallsized juice producers: MOFCOM also stated that the Transaction would have squeezed the ability of domestic medium and small-sized juice producers to compete and innovate effectively.
According to the Decision, MOFCOM and Coca-Cola held discussions on whether conditions could be applied to the deal to remedy the perceived anti-competitive effects. However, the conditions offered by Coca-Cola were not accepted by MOFCOM. The Decision does not reveal details about the conditions offered by Coca-Cola or if anything specific was demanded by MOFCOM.
On its face, the Decision indicates that MOFCOM’s reasons for prohibiting the Transaction were almost entirely related to technical antitrust assessment. There is no suggestion that foreign ownership of a well-known Chinese brand was a consideration that was taken into account. The Decision does not, however, contain any detail behind the broad conclusions as to anticompetitive effects and so there is no visibility of the evidence on which MOFCOM’s findings are based.
In particular, in listing the first concrete concern as being one of potential leveraging, MOFCOM appears to have concluded that carbonated soft drinks and juice were separate markets and further that it considered Coca- Cola to have a dominant position in the carbonated soft drinks market. While theories of harm of this sort do have some currency in Europe (where they are called ‘portfolio power’ or ‘conglomerate merger effects’), this is a controversial basis on which to prohibit a transaction and one that is generally not followed by other important enforcement agencies such as those in the US.
Indeed, even the guidance of the European Commission in this area indicates that ‘conglomerate mergers in the majority of cases will not lead to any competition problems’. In assessing if a tying strategy could be problematic, the Commission will typically assess whether the merged firm would have the ability and the incentive to foreclose competitors from access to the market through such a strategy, and if so, whether such an outcome would have a significant detrimental effect on competition. The Decision does not contain any indication of such an assessment. Likewise, there is no reference to consideration of potential buyer power of the merged entity’s customers such as large retail chains, which could be expected to be relevant.
Equally, in listing the more conventional theory of harm of market overlap in the juice market, the Decision’s emphasis of the significant increase of market power that would apparently arise due to ownership of two well-known brands (rather than an assessment of market shares and the ability of rival juice producers – all of whom have their own brands – to constrain the merged entity), seems to be only a partial analysis of relevant market conditions.
The one area where the Decision appears to depart from conventional antitrust assessment is its reference to an anticipated squeezing effect on small and mediumsized domestic juice producers. There is no discussion as to why domestic producers in particular should be protected, and this aspect of the decision, together with an earlier reference to the impact on ‘national economic growth’, may demonstrate a particular concern about the ability of domestic, as opposed to foreign, enterprises to enter the market.
Following on from MOFCOM’s use of its powers to require undertakings from Inbev on its acquisition of Anheuser- Busch, the Decision is a further example that MOFCOM is prepared to wield the full power of the AML. Given the significance of a prohibition decision in any jurisdiction, it is disappointing that so few details of MOFCOM’s reasoning have been made public and it is to be hoped that more clarity will surface in due course.