On Wednesday, Coca-Cola (NYSE:KO) got the bad news.
Citing Coke's "market dominance in carbonated soft drinks" in China, the nation's Ministry of Commerce this morning rejected Coke's bid to acquire China Huiyuan Juice Group (CHJ). The government stated that it feared the acquisition could be used to "limit competition in the market for juice through tying, bundling or other exclusive transactions... [and] have an adverse effect on the structure of competition in China's juice market."
Accordingly, Coke announced that the deal will not go through. Hooray!
Hooray?
As I argued way back in September, this deal was a bad idea from the get-go. Given that Coke's already hellbent growth in China (just last month, Coke revealed that China was its fastest-growing market, with quarterly unit volume up 29% year over year), there was no need to buy CHJ. What's more, the $2.4 billion bid that Coke cooked up to acquire CHJ was a saccharine offer. That sum represents:
- 45 times CHJ's estimated profits for this year -- pretty pricey relative to long-term expectations of 30% growth at the company.
- 6.3 times sales -- a higher valuation than the market accords to such asset-light Chinese businesses as Sina (NASDAQ:SINA) or Sohu (NASDAQ:SOHU), and almost dead-on the price investors pay for NetEase.com (NASDAQ:NTES).
Pundits have noted that Coke offered a 200% premium to Huiyuan's pre-bid market cap, but compared to these much lighter business models, the offer shows just how crazy a price Coke was willing to pay. I mean, I know how everyone says the Chinese don't drink as much juice as we do here in the West, and that this means the growth opportunities are phenomenal. But strong growth is available in Russia, for example, and yet its biggest, independent and publicly traded player, Wimm-Bill-Dann (NYSE:WBD), fetches a mere 0.4 times sales at today's price.
Foolish takeaway
Were price no object, I could certainly understand Coke's desire to steal a march on PepsiCo (NYSE:PEP) in China, and snag 43% share of the juice market in one fell swoop by buying CHJ. But valuation does matter. It always matters.
And that, Fools, is why Coke's "bad" news this morning is actually good news for shareholders -- and it's why investors are wrong to sell off the stock on today's news.
Read more about the Great Game of global beverage Risk in:
