HONG KONG/BEIJING (Reuters)- For executives and M&A advisers studying Diageo's (DGE.L) major step toward control of a Chinese white liquor maker last week, a celebratory clink and a toast of "ganbei" is in order.
After all, the approval from a key ministry for Diageo to take control of Sichuan Swellfun (600779.SS), China's fourth-largest premium white spirits maker by volume, confirms that foreign take-overs of Chinese brands are possible.
Ever since Chinese regulators blocked Coca-Cola's (KO.N) $2.4 billion bid in 2009 for the country's top juice maker, Huiyuan Juice (1886.HK), investors have worried such deals were effectively off the table.
It's a question that's bound to come up again as Nestle (NESN.VX) eyes a possible $2.6 billion deal to buy Chinese candy maker Hsu Fu Chi International (HSFU.SI).
But those who see Diageo's move as proof that China has swung the doors wide to foreign investors may have consumed too much baijiu, the clear, fiery drink that can have as much as 60 percent alcohol content.
"I don't think it's a breakthrough -- I'd be very skeptical that this deal is establishing some kind of pattern," said David Livdahl, a Beijing-based partner with law firm Paul Hastings who works with foreign investors.
Ahead of the deal, Sichuan Swellfun, which owns China's oldest baijiu distillery, agreed to divest a jewel in its portfolio, the Quanxing liquor brand. That addressed worries that regulators might balk at letting a famous Chinese brand fall into foreign hands.
The deal took nearly two years -- an eternity compared with most overseas deals. Added to which, the complicated transaction was only finalized after the British and Chinese leaders became involved.
Sources say Britain's prime minister was expected to announce the deal on his trip in China in November last year. Instead, the press release had to wait until Chinese Premier Wen Jiabao traveled to the UK last month.
While the decision shows progress when it comes to Beijing's view of outside money, anti-trust review will remain a major hurdle for foreign acquisitions in China.
A particular worry is the still-untested panel China set up last year to review deals for national security issues.
Livdahl said that mechanism allows regulators a great deal of discretion on which deals they approve.
"The reality is that China has a much finer net to strain out anything it wants with this national economic security review," he said.
Diageo has jumped over the anti-trust hurdle, and appears to have avoided national security concerns. The next and likely final step is the China Securities Regulatory Commission review, which is expected to take several weeks.
LESSONS LEARNED
When China's Ministry of Commerce rejected Coke's attempt to buy Huiyuan in March 2009, it cited the anti-competition term of "concentration." That rejection came a year after China enacted new anti-trust laws meant to bring regulation in line with international standards.
China was explicitly saying that a combined company would hurt smaller players too much. But public figures at the time showed that Huiyuan controlled 10.3 percent of China's fruit and vegetable market and Coke 9.7 percent -- hardly an overwhelming degree of market share.
What was implicitly stated at the time, according to advisers and lawyers, was that Chinese officials, among other factors including a post-Lehman market plunge, did not want to hand over a national juice brand to a foreign buyer in the end.
Diageo appears to have learned that lesson.
"<Because of the spinoff of the Quanxing brand>, this deal wasn't seen as impacting something that's seen as a national treasure, or a famous Chinese brand," said Bradley Lui, a partner with Morrison Foerster in Washington D.C. who specializes in antitrust issues.
The divestiture also means Diageo's market share in the white spirits segment will be much less than Coke's would have been in the juice segment, easing regulators' worries about over concentration.
Diageo's lead adviser was Vermilion Partners, while UBS (UBSN.VX) and Citic Securities also advised on the deal.
Diageo could also argue that the deal is good for China's stature overseas.
"There was the prospect that with this deal that Diageo would turn this brand into something that's sold outside of China," said Lui. "They could make the argument to the Chinese government that this is good exposure for a Chinese product."
But if the company's success is merely a product of clever tactics, that still leaves the question of whether China plans to allow more, and bigger, deals to go through.
"China cannot continue to block any and all significant foreign investments," said Marc Waha, a partner at law firm Norton Rose. "They are trying to show to the outside world that they are respectable and reliable player," he said.