Diageo Loves It Some Baijiu, and I Have Some Questions

Big news in the alcoholic drinks sector:

Diageo will acquire an additional 4% stake in Sichuan Chengdu Quanxing Group (Quanxing) for 140m yuan ($22m; £13m), taking its holding to 53%.

The deal will give Diageo an indirect control of Shuijingfang, a famous brand of popular Chinese spirit Baijiu. (BBC News)

If you don’t know UK-based multinational Diageo, you probably are familiar with some of their brands, which include Baileys, Smirnoff, Guinness and Johnnie Walker. Big player globally, so no surprise they wish to expand in China.

At first glance, this has “Big Deal” written all over it. Although I’m not much of a baijiu drinker, I understand that Shuijingfang is a fairly well-known brand, in part due to ramped up advertising in recent years.

China’s M&A Law and Anti-Monopoly Law both have provisions regarding acquisition of famous local brands by foreign entities, and it goes without saying that the Ministry of Commerce was well within its discretion to nix this deal if it wanted to.

Question #1: So why did the Ministry of Commerce approve this deal?

Several possibilities, and these are not mutually exclusive. First, this deal was announced during Premier Wen Jiabao’s trip to the UK, so you could chalk this up to a “deliverable” of the trip. In other words, Diageo had sufficient juice with the UK government, and they were high enough on the UK’s wish list when it negotiated Wen’s trip with Beijing.

Second, approving this deal sends a strong signal about local protectionism. At a point when foreign investor sentiment is frankly rather pessimistic (for a variety of reasons), Beijing can now point to this approval as evidence of government even-handedness and fair treatment of foreign enterprises.

Third, Quanxing (the target company), along with Diageo, had sufficient political capital to get this approved anyway, which would have happened notwithstanding Wen’s trip to the UK. This last possibility seems unlikely to me.

Question #2: Why was this deal held up for so long?

Apparently there was behind-the-scenes discussions on this for many months. This is not a great surprise, since Shuijingfang is a famous brand and maintains a not insignificant share of the baijiu market in China. Moreover, because Shuijingfang’s owner, Quanxing, is a listed company, the stock purchase will trigger a mandatory tender offer. In other words, this is pretty complicated.

On the other hand, of course, one would have liked to see an orderly, quicker review process from the Ministry of Commerce that was not so obviously political. (Just made myself giggle as I wrote that.) At the end of the day, though, I think Diageo, and foreign investors in general, will be happy with what they can get.

Question #3: Does this tell us anything about future M&A deals?

As much as I’d like to finish this post with a nice “Expect Trend X” type of flourish, I can’t really go there. This sort of high-profile deal is a one-off situation that was most likely resolved based on several factors that may not be present with future deals.

I’ve noticed that some of the press accounts thus far have compared this deal with the failed Coca-Cola bid for juice maker Huiyuan a few years ago. As I’ve done in the past, I would caution anyone who buys into the conventional wisdom that the rejection of that deal was local protectionism. Just as we don’t know for sure whether politics played a role in the Coke rejection, we don’t really know the substance of behind-the-scenes negotiations on the Diageo approval (hence the above questions).

Without inside knowledge, anything more is just speculation.

Read more at China Hearsay. You can also follow me on Twitter and Facebook.

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