The Coca-Cola Co. (KO) announced yesterday (Wednesday) that it will buy China Huiyuan Juice Group Ltd. for $2.3 billion (HK$17.9 billion) in an effort to diversify its presence in one of the world’s fastest-growing beverage markets. But the deal still requires government approval, which is anything but guaranteed.

Coca-Cola’s offer of $1.56 per share (HK$12.20) is more than triple China Huiyuan’s recent closing price of HK$4.14 a share. It is the company’s largest overseas acquisition to date, and the biggest foreign takeover of a Chinese company ever. The deal values Huiyuan at 46.6 times this year’s estimated earnings, according to Bloomberg data.

“It’s a sizeable offer, but certainly a very smart one,” said Lou Basenese, editor of the Oxford Club’s Takeover Trader. “It’s better than building everything from ground zero. It’s a shortcut into a promising market.”

By 2025, China’s middle-class is projected to exceed 600 million. That’s twice the size of the entire population of the United States. And a great many of those people will be drinking Huiyuan products.

Sales of fruit and vegetable juices in China will grow 16% to $12.3 billion this year alone, according to Euromonitor International, whereas carbonated beverage sales are only forecast to rise 7% to $7.94 billion.

That gives Huiyuan a decided advantage. And not just because it’s a hometown player. With 220 beverage products and a 10.3% market share, Huiyuan is actually China’s biggest producer of fruit and vegetable juices. And when it comes 100% pure juice products, the Beijing-based beverage giant accounted for 43% of all sales last year.

“There’s no question Huiyuan is the market leader in China. It just isn’t a huge market right now,” said Basenese. “But that’s true of all emerging markets. It’s the massive growth potential that makes this deal, and emerging markets in general, attractive.”

Coca-Cola says that it expects more than 80% of its future growth to come from markets outside of the United States. The company’s sales in China jumped 18% last year.

There is also growing speculation that Coca-Cola will take Huiyuan’s products abroad.

“It’s very possible Coca-Cola will leverage the Huiyuan brand, acquire other Chinese juice makers, then boost their output for export,” Lawrence Chor, analyst at Tai Fook Securities, told Reuters.

However, the acquisition is still up for regulatory approval and there’s no guarantee the deal will pass.

Takeover Opportunities Abound in Emerging Markets

Inbound mergers and acquisitions are notoriously difficult in China, where state interference and red tape ensnare corporations and nationalistic pride triggers protests against foreign companies seeking influence over popular domestic brands.

“There are two main difficulties,” Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, told Xinhua. “One is the large size of the two companies, which will raise concerns about monopolies. The second is that the brand of Huiyuan is considered to be protected as a famous domestic brand.”

In July, U.S. private-equity firm The Carlyle Group ended its Herculean effort to buy a stake in Xugong Group, one of China’s biggest manufacturers of construction machinery, after three years of attempting to plow through regulatory resistance.

There’s also the matter of the U.S. government preventing Chinese companies from acquiring U.S. assets.

In September 2007, Huawei Technologies Co. and Bain Capital Partners LLC launched a $2.2 billion takeover bid for Internet-equipment-maker 3Com Corp. (COMS). That deal was blocked when it was revealed that exposure to 3Com’s technology might allow China to eavesdrop on U.S. domestic conversations, or make Chinese networks harder to tap. Three years ago, CNOOC Ltd. (ADR: CEO), a unit of China’s top offshore oil and gas producer, was forced to abandon its $18.5 billion bid for Unocal, after a political uproar in the United States.

“If you think back to Unocal or 3Com, there is already [a] precedent for the Chinese government to return the favor and block any U.S. company from making too big a splash in its domestic market,” said the Oxford Club’s Basenese.

Whether Coke’s deal for Huiyuan goes through or not, another potential takeover target is Wimm-Bill-Dann Foods OJSC (ADR: WBD), says Basenese. WBD is Russia’s largest dairy company and a global manufacturer of dairy and juice products.

The company fell short of analysts’ expectations in the second quarter, as high raw milk costs and slowing demand pinched margins and led to just an 8.8% rise in net profit. However, sales jumped 26% to $760.1 million, and earnings before interest, taxes, depreciation and amortization (EBITDA) were up 21% from a year ago, reaching $93.1 million.

WBD could easily find itself in the crosshairs of Coca-Cola, Groupe Danone SA (OTC: GDNNY), or Coke rival PepsiCo, Inc. (PEP).

In March, PepsiCo spent $1.4 billion to acquire Lebedyansky JSC, a Russian producer of juice, juice drinks, nectars, ice tea, mineral water, baby juices and baby food. And it won’t stand pat if Coke succeeds in its bid for Huiyuan. And Danone, which owns one-fifth of Huiyuan, is a minority shareholder in WBD, as well.

Danone has already agreed to sell its stake in Huiyuan to Coca-Cola, and with such a generous offer on the table, is in the perfect position to reap a war-chest-filling windfall for its Huiyuan shares. With that cash on hand, many analysts believe that Danone may seek a larger stake in WBD, if not an outright takeover.

Danone appointed its senior executive to WBD’s board in 2007.

[Editor’s Note: Takeover Trader Editor Lou Basenese cut his teeth as a senior research analyst for Wall Street’s biggest investment bank. Taking what he learned on "The Street,"Basenese has time and again displayed an ability to predict global deals before they happen, and to offer analysis of the business sectors he believes will soon be "in play." For additional insight on the global takeover game, click here to check out this latest research report issued by The Takeover Trader.]

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