March 18 (Bloomberg) -- China rejected Coca-Cola Co.’s $2.3 billion bid for China Huiyuan Juice Group Ltd., saying the biggest foreign takeover of a Chinese company would have been “negative for competition” in the country’s drinks market.

Coca-Cola might have used “its dominant position” in the carbonated drinks industry to push up prices and limit choices for consumers, the Ministry of Commerce said in a statement on its Web site today. Huiyuan fell by a record 19 percent in Hong Kong trading before being halted.

The decision comes after the World Bank yesterday urged governments to “not heed the siren-song of protectionist fixes” after it found most Group of 20 members had introduced restrictive trade practices. Coca-Cola controls more than half of China’s soda market and the ministry’s decision will cost the world’s largest soft-drinks maker the opportunity to boost its share of China’s fast-growing juice market.

“This seems to me to be against China’s best interests,” said Martin Currie Investment Management Ltd.’s Emerging Markets Director Chris Ruffle, whose Shanghai-based fund owned 13 million Huiyuan shares according to August 2008 filings. “It plays into the hands of protectionists who will now find it easier to block acquisitions which Chinese companies try to make overseas.”

Coca-Cola, which can appeal the decision, according to Article 53 of China’s anti-monopoly law, won’t proceed with the takeover, it said in a statement sent by e-mail.

“We are disappointed, but we also respect the Ministry of Commerce’s decision,” Coca-Cola Chief Executive Officer Muhtar Kent said in the statement.

‘Discouraging Impact’

The decision will have a “discouraging impact” on companies considering acquisitions in China, said Lester Ross, a partner in charge of the Beijing office of Wilmer Cutler Pickering Hale & Dorr LLP. “You had a willing seller and a willing buyer in an industry which has absolutely no economic or national security implications, and yet the decision was turned down.”

Huiyuan confirmed the ministry’s rejection in a statement to Hong Kong’s stock exchange.

“I’m stunned,” said Eliot Cutler, the partner in charge of Akin Gump Strauss Hauer & Feld LLP’s Beijing office, declining to comment further because the firm is counsel for Coca-Cola in the U.S.

Protectionism

The World Bank said 17 of the Group of 20 developing and industrial nations introduced restrictive trade practices since pledging in mid-November to avoid protectionism. Australian lawmakers today began an inquiry into investment laws amid a backlash from politicians and shareholders over Aluminum Corp. of China’s planned $19.5 billion funding deal with Rio Tinto Group.

“Beijing wants to protect its own brands,” Renee Tai, Hong Kong-based food and beverage analyst at CIMB-GK Securities (HK) Ltd., said before the Commerce Ministry’s decision was published. “Drinks are not politically sensitive products, but it’s purely political.”

Huiyuan fell by HK$2 to HK$8.30 in Hong Kong, the most since it started trading in February 2007, after the Financial Times reported Coca-Cola may abandon its takeover bid. Huiyuan’s stock, suspended 13 minutes after trading started, is now 32 percent below the HK$12.20 per share offered by Coca-Cola. It resumes trading tomorrow.

Proposal Amended

The Commerce Ministry said Coca-Cola was asked to “provide a solution” for how to “minimize the adverse effect” of the deal on competition in the juice market. While the U.S. company offered to change its proposal, the ministry “concluded that the amendments could not effectively reduce the adverse impact on competition brought by this merger,” it said in its statement.

Allowing the deal to push through would have made it more difficult for smaller rivals to survive, the agency added.

“It’s a surprise decision for me,” said Qiu Dongrong, consumer analyst at CSC Securities HK Ltd. “We didn’t expect this to affect competition.”

Acquiring Huiyuan would have boosted Coca-Cola’s share of the juice market to more than 20 percent, helping maintain its lead over Pepsico Inc. as U.S. soda sales slow. The deal would have been the U.S. beverage maker’s biggest overseas acquisition.

The Atlanta-based company’s sales by volume rose 19 percent last year in China and declined by 1 percent in North America.

Market Share

China’s fruit- and vegetable-juice sales may rise 20 percent to 97.1 billion yuan ($14 billion) this year, almost double the rate for carbonated drinks, according to Euromonitor International.

Coca-Cola controlled 52.5 percent of the Chinese soda market by volume in 2008, compared with Pepsi’s 33 percent, according to Euromonitor. Coca-Cola had 12 percent of the fruit- and vegetable-juice market and Pepsi 1.4 percent. Huiyuan had an 8.5 percent share while controlling 33 percent of the pure-juice market.

Coca-Cola proposed to purchase Huiyuan for at least HK$17.9 billion ($2.3 billion) in September. The cost of the deal could have risen to HK$19.6 billion depending on whether Huiyuan bonds were converted into shares.

Coca-Cola said March 6 it plans to invest $2 billion in China over the next three years to win more of the nation’s 1.3 billion consumers. It has invested $1.6 billion in China since returning in 1979, and sponsored last year’s Beijing Olympics as part of its role as a global Olympic partner.

Apart from Coca-Cola, Sprite and Minute Maid, the Atlanta- based beverage maker also sells Yuan Ye, a green tea drink, in China. The carbonated drinks market may grow 11 percent to 74 billion yuan this year, according to Euromonitor.

To contact the reporter on this story: Stephanie Wong in Shanghai at swong139@bloomberg.net; Wing-Gar Cheng in Beijing at wgcheng@bloomberg.net

Last Updated: March 18, 2009 08:20 EDT