What ChinaCos can learn from Bright Food's French acquisition

Author: Janice Qu | Published: 26 Jul 2012
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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