Danone to Exit Joint Venture With China's Wahaha

Source: The Wall Street Journal by James T. Areddy

SHANGHAI – France's Groupe Danone SA will accept a cash settlement to relinquish claims to the name Wahaha, one of China's best-known brands, in a decision to exit a valuable consumer-products business after a rare public battle for control of it.

In a joint statement Wednesday, Danone announced a settlement with China's Hangzhou Wahaha Group Co. by saying its 51% share in existing joint ventures that make soft drinks and related products will be sold to the businesses' Chinese partners. "The completion of this settlement will put an end to all legal proceedings related to the disputes between the two parties," the statement said.

No financial terms were announced. A person familiar with the matter said the settlement amount is "slightly below" the figure Danone has cited in previously published financial accounts as the value of its Wahaha holdings: 381 million euros, or about $555 million.

The Wahaha brand is among the most famous in China. It ranked No. 16 among domestic brands and is worth $2.2 billion, according to a recent report by Shanghai research firm Hurun Report, which uses qualitative and quantitative measures to arrive at brand values. In recent years Wahaha has sold more drinks in China than even Coca-Cola Co., according to some reports.

Over the past two-plus years, a public feud over control of the Wahaha empire offered a rare peek into the breakup of a major Sino-foreign joint venture. And Danone's strategy to publicly confront its partner, and Wahaha's to respond with its own accusations, marked a bold break with prevailing business theory that problems in China are best settled with face-saving, private negotiations.

Whether one side won or lost is less clear to analysts, who agreed the case served to reinforce how difficult it is to operate a partnership in China. "That's a key lesson: To build a [brand] business in China you need to build from the ground up," said Jonathan Chajet, China managing director for consultancy Interbrand.

In 2007, Danone went public with stunning allegations against its partner of more than a decade, Zong Qinghou, Wahaha's founder and a Chinese folk hero entrepreneur.

The French company charged that Mr. Zong had for years produced and sold Wahaha-branded drinks using a network of operations that he owned and which mirrored the joint ventures. Danone said that cut it out of the 51% in earnings from anything carrying the Wahaha name that it was entitled to under contracts signed in 1996.

Moreover, Danone said Mr. Zong reneged on a late 2006 agreement that would have settled the matter amicably.

For his part, Mr. Zong never denied he established Wahaha-branded businesses outside the ventures but said it was done with the blessing of Danone. A colorful figure, brilliant marketer and active blogger, Mr. Zong argued the original agreements were outdated and unfair, written when he was a regional player and Danone was one of the world's largest companies.

In rabble-rousing speeches, he claimed to represent China's long-term interests, while dismissing Danone as a company hungry for short-term profits.

"One of the most successful alliances in China" degenerated into a case study of a relationship that "was not sustainable in the long run," according to Teng Bingsheng [surname: Mr. Teng], a professor of Cheung Kong Graduate School of Business in Beijing.

Deep distrust and loss of face on both sides, Mr. Teng said, made Danone's eventual exit likely. "For the simple reason Mr. Zong is the one who runs the show," he said.

Mr. Zong founded the Wahaha group in the late 1980s, pricing soft drinks cheaply and pushing them with widespread distribution, some of China's first television advertisements and a catchy name that roughly translates as "laughing baby." In 1996, he and Danone began establishing joint ventures to sell drinks under the Wahaha name.

Eventually Danone owned 51% of around 40 joint ventures, but left Mr. Zong to run them with virtually no oversight.

Over the past two years, the companies traded accusations through the press and filed dueling lawsuits in courts around the world, some of them directed at individuals at the center of the ventures. At one point, Danone estimated its losses from Mr. Zong's ventures at $100 million, while Mr. Zong responded that "the French" had no claim on a business he built into a multibillion dollar empire.

As the heat built up, the leaders of France and China even addressed the dispute at a 2007 presidential summit.

In some of the legal actions, Mr. Zong appeared to prevail, particularly in Chinese courts, while Danone chalked up successes on foreign soil. The case went beyond the companies: Mr. Zong's family members were investigated by U.S. tax authorities over their financial ties to the joint ventures.

Until the settlement signed Wednesday in Beijing witnessed by Chinese Commerce Ministry officials and the French ambassador, an internationally binding arbitration was expected to emerge from Sweden on the case within weeks.

Now, the settlement is subject to approval by Chinese authorities. It is expected to be competed before year end.

Danone, which reported Wahaha business generated about 10% of its global revenue in 2006 but has since adjusted how it accounted for Wahaha, said it expects no impact on its income statement from the Wahaha settlement. In China, it will be left with a much smaller footprint and is essentially starting over, pushing its Bio-brand yoghurt through a recently launched, wholly-owned business that has none of the distribution might as Wahaha controls.

"We are keen to accelerate the success of our Chinese activities," Franck Riboud, chief executive officer and chairman of Danone said in the statement. He said he is confident Wahaha will "continue to be highly successful."

For the closely held Wahaha, its one-time appeal to consumers on nationalistic grounds has worn off and it is faced with following through on plans to extend its reach overseas without a sizable international partner, analysts said.

"Chinese companies are willing to cooperate and grow with the world's leading peers on the basis of equality and reciprocal benefit," the statement quoted Mr. Zong as saying.

Source article: http://online.wsj.com/article/SB125428911997751859.html