Warburg exit leaves Huiyuan in the lurch

Sun is the managing director of Warburg Pincus Hong Kong Branch and also responsible for the investment business of Warburg Pincus in North Asia.

Share prices of Huiyuan Juice declined nearly 9.1 percent to HK$5.96 on Tuesday following the Warburg news. The drop is the largest ever since the Ministry of Commerce rejected the Coke bid. Huiyuan shares had fallen to HK$8.3 from HK$10.3 on March 18, and further to HK4.8 on March 19.

Yesterday, the company's shares eased up by 0.67 percent.

Huiyuan Juice also has to face the possible risk of paying back the debt if the bonds cannot be converted into shares. The bonds are slated to expire in June 2011.

It has also been reported that global private equity funds like Blackstone, TPG and The Carlyle Group have recently held talks about a possible minority investment in Huiyuan Juice.

Zhu Xinli, Huiyuan Juice's founder and chairman, owns 41 percent of the shares in the company, followed by France-based Danone with 23 percent. Danone chief executive officer Emmanuel Faber had recently said the company would delay selling its shares in Huiyuan Juice till its business improves, according to the Economic Observer.

Faber said a reasonable price for Danone's 23 percent share in Huiyuan Juice would be around $420 million, which means, the company would be valued totally at around $1.68 billion, 70 percent of the original Coca-Cola offer.

An unnamed analyst quoted by Beijing Business Today said the Warburg's exit was triggered by Huiyuan's lackluster performance and unclear strategy.

In 2008, Huiyuan Juice posted turnover of around 2.82 billion yuan, up 6.2 percent from a year earlier, but the profit attributed to the shareholders decreased by 86.1 percent to 88.9 million yuan during the same period.

According to research firm AC Nielsen, in 2008, Huiyuan's juices and nectars continued to rank as the market leader by sales volume, with market shares of 42.1 and 43.6 percent respectively.

But juices with low concentration, a sector that makes up for over 50 percent of the juice market and more profitable, is still an untapped area for Huiyuan Juice.

Huiyuan has recently launched a juice with low concentration called Lemonme, to fight against peers like Coca-Cola, Uni-President and Master Kong. But its price is less competitive than its peers.

The company recently invested 300 million yuan to develop a fruit-processing factory in Shaanxi province that has rich fruit sources. The factory is expected to start operations by February 2010. Since late 2008, the company has injected 2 billion yuan in building up such factories.

"The investment is in line with our long-term development strategy," said the company's spokesperson.