July 6, 2011 3:49 AM EDT
For executives and M&A advisers studying Diageo's 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, 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 $2.4 billion bid in 2009 for the country's top juice maker, Huiyuan Juice, investors have worried such deals were effectively off the table.
It's a question that's bound to come up again as Nestle eyes a possible $2.6 billion deal to buy Chinese candy maker Hsu Fu Chi International.
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.
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"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.
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