Slaughter and May is advising Swire Beverages Holdings on the expansion of its Coca-Cola franchise territories in Mainland China

Slaughter and May, Hong Kong is advising Swire Beverages Holdings Limited (SBHL), a wholly-owned subsidiary of Swire Pacific Limited (Swire Pacific), on its entry into a conditional master agreement on 17 November 2016 with The Coca-Cola Company (Coca-Cola) and a subsidiary of China Foods Limited (China Foods) and its proposed submission of a bid in an auction conducted in accordance with PRC law to acquire certain assets from the China Foods group. If the bid is successful and the conditions to which it and the master agreement are subject are satisfied, there will be a realignment of the Coca-Cola bottling system in Mainland China.

The realignment will be effected by transfers of equity interests in companies owned by the parties to the master agreement which are engaged in the manufacture, distribution and sale of non-alcoholic ready-to-drink (NARTD) beverages in Mainland China.

Under the realignment Coca-Cola will cease to be directly interested in bottling operations in Mainland China. This will leave subsidiaries of SBHL and China Foods with larger bottling operations in contiguous territories. This is expected to improve efficiency, result in savings in distribution and general and administrative costs and permit faster and better aligned decision making.

SBHL has also agreed to acquire from a subsidiary of Coca-Cola the 12.5% interest in Swire Beverages Limited (SBL) which is not already owned by SBHL. SBL is the holding company for the majority of Swire Pacific’s interests in companies engaged in the NARTD business in Mainland China and Hong Kong. The agreement is conditional on the realignment proceeding.

If the realignment proceeds it will result in SBHL having controlling interests in companies operating in territories in which it is estimated that 49% of the population of Mainland China live and in which 51% of Coca-Cola beverages were consumed in Mainland China in 2015. The corresponding estimated percentages before the realignment are 31% and 34% respectively. At present, SBHL has interests in franchise territories in Mainland China in Fujian, Anhui, Henan, Shaanxi, Guangdong, Zhejiang and Jiangsu. SBHL will take on franchise territories in Hubei, Guangxi, Yunnan, Jiangxi, Hainan and Shanghai and the cities of Zhanjiang and Maoming in Guangdong, and will increase its interests in franchise territories in Jiangsu, Zhejiang, Anhui, Fujian, Henan and Guangdong. The Shaanxi territory will be transferred to a subsidiary of China Foods.

The net amount expected to be payable by SBHL in respect of the realignment and the acquisition of 12.5% of SBL is RMB5,869 million, subject to completion adjustments.Swire Beverages, a division of Swire Pacific, has the exclusive right to manufacture, market and distribute products of Coca-Cola in Hong Kong, Taiwan, seven provinces in Mainland China and an extensive area of the mid-western USA. The relationship with Coca-Cola began in 1965, with the acquisition by Swire of the majority shareholding in the Hong Kong bottling company. Swire Beverages manufactures 58 beverage brands and distributes them to a franchise population of over 460 million people.

Lisa Chung Partner
Natalie Yeung Partner
Jocelyn Poon Associate