Coke's China Play Expensive, Carries Risks

The lure of the fast-growing Chinese consumer market is strong. So strong that Coca Cola is willing to bet billions of dollars and years of having its earnings dragged down on the uncertain promise that its proposed $2.4 billion purchase of, Huiyuan Juice Group, the country’s biggest juicemaker, will pay off.

Everything else being equal, it will pay off big time. Huiyuan has nearly half of China’s fresh juice market. And Coke told the New York Times that Huiyuan’s compound annual growth rate over the past three years is 31 percent, even as the overall juice market in China has been growing at 12 percent a year. On top of that, Huiyan exports to 30 countries, including the United States, which will help Coke build on its aggressive efforts to dominate the global market for non-carbonated drinks as demand for sodas deflates.

But everything else is rarely equal in China, where the government often seems torn between its competing desires for national self-sufficiency and foreign investment, and where deals often look very different years or even months down the road from what had been agreed-upon and seemingly understood by all parties. The government will have to OK the deal, which may run afoul of the country’s new antimonopoly law.

On top of that, margins in the Chinese juice market are thin, with lots of small players fighting for market share. The acquisition will give Coke a 20 percent share of the overall juice market, but profits won’t come for several years, according to Coke.

For all that risk and potential reward, Coke is paying a huge price — nearly 7 times Huiyuan’s revenue, and 45 times cash flow, according to Barron’s.

The acquisition would be the second-largest in Coke’s history and the largest-ever takeover of a Chinese company by a foreign buyer.