Bright
Food’s second high-profile acquisition of the year has sent the company into
the French-wine industry. But Chinese companies still have a lot to learn when
it comes to outbound investments
Bright Food, one of China’s largest food
producers, is set to acquire 70% of the Bordeaux wine trader Diva Bordeaux,
getting a foothold in the famous French wine-making region. This follows the
state-owned enterprise’s acquisition of 60% of shares in the UK cereal maker
Weetabix from Lion Capital in a deal worth £1.2 billion ($1.8 billion).
The sale, for an undisclosed sum, was
announced on June 25 and has been processed through Bright Food’s subsidiary
Shanghai Sugar Cigarette and Wine. Asian markets make up 60% of Diva’s sales,
with China, the world’s biggest importer of Bordeaux wines, accounting for 45%.
Previous deals have seen Chinese companies purchase vineyards, but this is the
first time a major Chinese company has purchased a wine merchant.
Despite the increasing number of
acquisitions Chinese companies are making in the European food and drink
industry, they still face a series of challenges.
“Chinese companies have difficulties in
competing in an open bid process that requires decisions to be taken very fast
to succeed. Their decision process is too slow,” said Guillaume Rougier-Brierre of Gide Loyrette Nouel, who advised on the acquisition of vineyard
Château de Viaud in the Lalande-de-Pomerol wine growing area of Bordeaux by
Chinese state-owned agricultural group COFCO in 2011.
A further difficulty lies in the
uncertainty surrounding the process of securing authorisation from China’s
Ministry of Finance, which allows domestic companies to set up foreign holding
vehicles to acquire companies abroad and to finance their acquisitions.
“They usually cannot secure authorisation
early in an acquisition process,” said the Paris-based partner. “Their offers,
if not very competitive, are weakened by such uncertainty. Their offers end up
being not so binding and that may frighten foreign sellers, in particular
private equity funds.”
Despite these challenges, China’s appetite
for foreign assets continues to grow. Guillaume said that Chinese investments
into Europe have increased remarkably in the last six months. “We see an
increasing interest from Asia to seize opportunities in Europe, as many assets
are available here,” he said.
According to statistics from Reuters,
China has seen wine consumption soar 110% in 2011 from 2010. Of 1,100 chateaux
along the Garone river in Bordeaux, 20 of them have been taken over by Chinese
purchasers and the number is expected to go up to 30 by end of 2012.
Bright Food’s acquisition would allow Diva
to access its domestic distribution network, which has more than 300 retail
outlets in Shanghai and beyond.
The Dutch bank Rabobank’s Wine
Report shows that the wine market in China, where French Bordeaux and
Burgundy dominate the high-end and new world wineries and premium Chinese
wineries dominate the mid-range.
The wine is distributed directly to
contacts in businesses and the government, which is not a channel where
well-known brands tend to thrive. It is important for newcomers to work with a
well-established distributor and rethink their pricing strategy.
Nevertheless, interests may be aligned as lawyers
point out that the merger also helps Bright Food in securing sourcing of wines
with a good local franchise.
For lawyers, the rules are simple. “You
cannot deal efficiently with SOEs, especially if you have never worked in China
and cannot support them with a bi-cultural team, mixing Chinese speakers and
foreign experts,” said Guillaume Rougier-Brierre.
Herbert Smith advised Bright Food’s
subsidiary Shanghai Sugar Cigarette and Wine on the deal.
This article first appeared in
IFLR's sister publication China
Law & Practice.