Coke, Keep Your Cash - JPM

by: Ockham Research

Coca-Cola’s (NYSE:KO) attempt to expand its presence into the Chinese beverage market was shunted by the Chinese government on Wednesday. China said that allowing Coke to buy a large juice company, China Huiyuan Juice Group Ltd., for $2.4 billion would restrict competition - the fear being that Coke, already with more than 50% market share for carbonated drinks, would be able to crush smaller competitors in the China beverage market, and in turn lead to fewer choices for consumers and possibly higher prices. The deal was the first test of newly strengthened anti-monopoly legislation in China. This acquisition would have been the largest of any Chinese company by a foreign entity.

However, as CNBC’s Squawk on the Street reported, this may not be a defeat for Coke,

Coca-Cola, looks bad because they didn’t get the big juice deal but some like JP Morgan are saying $2.4 billion was what they were going to pay for the juice deal, that’s too much to pay for growth.ockham historical valuation KO

Coke has undertaken a growth strategy that is heavily focused on the Chinese market. There was a major marketing push during the Beijing Olympics last summer, with Coke remaining one of the largest sponsors of the games. Coke has planned to spend $2 billion over the next 3 years to strengthen its position in China, that commitment was in addition to the $2.4 billion that Coke was going to spend on this deal. There is no doubt that this is a setback in Coke’s China strategy, but they might be better served putting that money to use establishing their own juice division in China. According to the Wall Street Journal, Huiyuan’s market share has begun to slip as it was 44% at the end of last June but declined to just 32.6% by the end of the year. That is a substantial decline, and reflects that Coke was not going to get as much market share as they had anticipated.

Clearly, Coke has an eye towards China in its growth strategy (Coke Focuses on Growth Within China). Perhaps acquisitions are going to be more difficult going forward, but if Coke uses those funds to build their own operations then they may in fact be better off. It would give the Chinese government the competition that it is hoping retain and grow, and Coke will be able to expand its global footprint to the fastest growing market.

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