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Coke Spends on Technology and Infrastructure in China


The Coca-Cola Company opened a $90 million innovation and technology centre in Shanghai on Friday. The company also announced that it will pump a further $2 billion into China over the next three years. The news comes just weeks before the deadline for the completion of Coke's proposed takeover of domestic drinks company Huiyuan Juice.

The new research centre, Coke's largest in Asia, will look at developing new products suitable for Chinese tastes—where drinks like juices and teas are preferred over Coke's traditional mainstay, carbonated beverages.

The $2 billion of further investment will be spent on new plants and distribution infrastructure, sales and marketing, and research and development. The investment announced is greater than all the money the US drinks giant has put into China since it returned to the country in 1979, estimated at $1.6 billion.

The timing of the announcement is likely to be linked to the imminent deadline for Coke's takeover of Huiyuan Juice, which is due for completion on March 23. In September, Coke revealed a $2.4 billion offer for control of Huiyuan and has since been waiting for regulatory approval under China's new anti-monopoly law. The regulator's decision is critical because it will signal China's attitude towards inbound M&A deals.

Coke is advised on the Huiyuan deal by the Royal Bank of Scotland, while Huiyuan Juice is advised by Goldman Sachs. The controlling shareholder of Huiyuan, Huiyuan Holdings. is advised by UBS.

The regulator's decision is likely to be watched from all corners of the world as China is also aggressively pursing outbound targets. China is awaiting approval from Australia's Foreign Investment Review Board (FIRB) for the acquisition of stakes in two mining assets and China may not want to send a message that it plays by different rules on its home ground.

As for Coke, the US soft drinks compnay will be hoping that by injecting large chunks of cash into China, its third largest market, it will be corroborating its long-term commitment to the country. The acquisition has proved controversial, with accusations that Zhu Xinli, the man behind Huiyuan, has sold out to a foreign multinational.

In terms of multiples, $2.4 billion is six times Huiyuan's 2007 revenues and 26 times its trading profits. At HK$12.20 a share, it represents a premium of 195% to the price of the target's shares before the deal was out. Although shares in the company rocketed after the deal was announced, reaching HK$10.94, six months of market turmoil have pulled the price down again to HK$9.1, suggesting that perhaps Coke could have got away with paying less. Indeed, some sources suggest that if the deal were to unravel it would be a blessing for Coke. Market conditions have worsened in the time since the deal was announced and a couple of billion dollars on Coke's balance sheet could be welcome in these uncertain times.

But Coke president and CEO, Muhtar Kent, presented a picture of confidence in February when he spoke to analysts about the company's fourth quarter 2008 and full-year financials. In a transcript posted on seekingalpha.com, Kent highlighted that the company had delivered another quarter of strong performance, marking its ninth consecutive quarter of double-digit earnings per share growth and the third straight year of meeting or exceeding targets. "Simply said, we were built for times like these," said Kent referring to Coke's ability to weather the recession which has adversely impacted results at a number of companies.

China's importance was apparent on the call which mentioned the world's most populous country time and again. Sprite sales reached two billion units in annual volume, driven by China; the Olympic sponsorship allowed Coke to connect with half a billion consumers; Coke's product Minute Maid Pulpy was deemed a "huge success in China" reaching a volume of a couple of hundred million cases; and China's volume growth of 19% in 2008 was highlighted.

Coke's bullishness on China is not surprising. Per capita consumption of Coke beverages in 2008 was 24 units per person per annum, compared to over 400 in North America. Even accounting for the difference in purchasing power and consumption preferences, the potential for Coke to further penetrate China seems indisputable. If the money spent on Huiyuan takes Coke a little closer to that goal, even the expensive deal it has struck may be worthwhile.

Copyright FinanceAsia.com Ltd., a subsidiary of Haymarket Media Ltd


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