Jianlibao: the Ups and Downs of a Beverage Giant

By staff reporters Long Xueqing and Zhang Xiang A chaotic ownership reshuffle has brought beverage maker Jianlibao Group Co. Ltd into the national spotlight. The group, based in Sanshui District of Foshan in South China's Guangdong Province, now hovers on the verge of bankruptcy. The Jianlibao story began more than three years ago, when Zhang Hai took control of the group from founder Li Jingwei. In the second half of 2001, the Sanshui District government began an equity-restructuring project for the renowned State-owned beverage giant, which boasted a sales volume of 6 billion yuan (US＄723 million) in its heyday. Insiders say the government was unwilling to sell the company to the management team headed by Li Jingwei. Several foreign companies, including Singapore's Tee Yih Jia Food Manufacturing Pte Ltd and the French Group Danone, showed strong interest in purchasing the company. In mid-January, 2002, however, the Sanshui district government decided to sell the group to the Zhejiang International Trust and Investment Co Ltd (ZITI), which was controlled by 28-year-old Zhang Hai. On January 15, 2002, the Sanshui government signed an agreement with ZITI, transferring to the company 75 percent of Jianlibao's shares, valued at 338 million yuan (US＄40.2 million). The Jianlibao Group has three shareholders, including the government-controlled State-Asset Investment and Management Co of Sanshui (SAIM), which holds 75 percent of the group's stake, and two other companies. The two parties agreed that the remaining 25 percent would be purchased back, with 15 percent to be bought by Zhang and 10 percent by the Sanshui government. By January 20, Zhang had paid 238 million yuan (US＄28.7 million) to complete the purchase. The remaining 100 million yuan (US＄12 million) would be paid later, according to the agreement. Zhang, with limited capital under his own control, sought new investors to pump funds into the restructured Jianlibao group. On March 20, 2002, Zhu Weisha, board chairman of Yuxing Infotech, together with Ye Honghan and Zhang Hai, formed the Foshan Sanshui Zhengtian Technology Investment Co Ltd to take ZITI's Jianlibao stake. Zhu paid 238 million (US＄28.7 million). Insiders tell that Zhang co-operated with Zhu to take advantage of Zhu's capital and repay the 200 million yuan (US＄24.1 million) he had borrowed to purchase the Jianlibao stake. In July, 2002, the Jianlibao Soft Drink Factory, which had been controlled by SAIM and represented 75 percent of Jianlibao's shares, was renamed Jianlibao Health Industrial Investment Co Ltd (JHII), with Zhengtian Technology holding 90 percent of its shares and Zhang Hai holding the remaining 10 percent. Later Zhang created a new company, registered in the Virgin Islands as the CASA Asia Co Ltd. By October 10, 2003, this new company held 37 percent of Jianlibao's shares, with JHII holding 53 percent and SAIM holding the remaining 10 percent. On December 23, 2003, Zhang put another 34.67 million yuan (US＄4.18 million) into the group, increasing the JHII stake in Jianlibao to 58.32 percent, with CASA holding 32.81 percent and SAIM holding 8.87 percent. After taking control of the group, Zhang began to streamline the corporate structure and launch new products. He also invested billions of yuan purchasing shares of listed companies. Analysts, however, suspected Zhang was using bank loans to operate in the capital market, making the group vulnerable to a debt crisis. An audit report shows by the end of 2003, Jianlibao owed 2.2 billion yuan (US＄265 million) to the banks. In contrast, by the end of 2001, before Zhang stepped in, Jianlibao's outstanding debt stood at only 1.36 billion yuan (US＄163.9 million). Meanwhile, Jianlibao made serious strategic mistakes in the soft drink industry. Its overemphasis on marketing and failure to strengthen production and logistics support led to losses of 300 million yuan (US＄36.1 million). The worsening situation prompted Zhu and Ye to force Zhang off of the board of Jianlibao. In July, 2004, Zhu and Ye became new board members and gained control of the board. Insiders tell that by making this move, Zhu was eager to save the group and his investment. By then, however, the company had virtually stopped production and defaulted on payments to its employees. On September 22, 2004, financial institutions in Sanshui held a meeting to send an ultimatum to Jianlibao, threatening to sue the company if it failed to pay its debts. To save the group, shareholders began to spot new strategic investors to restructure the company. Taiwan-based food conglomerate President Group emerged as one of the leading options.. On October 9, 2004, President and Jianlibao signed a cooperation referendum. In the meantime, distributors of Jianlibao took the possible entry of President, which has its own distribution networks, as a potentially fatal blow to their business. They lobbied the Sanshui government to allow them to form a trading company and take over Jianlibao. The new company, according to their plan, would manage business operations after production resumed, but would not be responsible for Jianlibao's debts. As a result, the President-Jianlibao cooperation plan fell into deadlock. Zhu Weisha, at the same time, managed to get Li Zhida, chairman of the Beijing Huizhong Tianheng Investment Co Ltd. to invest in Jianlibao. Through purchasing the stake held by Zhang, Zhu and Ye, Li Zhida held 91.1 percent of Jianlibao's equity. Analysts say Li Zhida underestimated the potential risks in the deal. The Sanshui government had lost trust in outside strategic investors after the huge losses incurred after Zhang Hai took over Jianlibao three years earlier. Right after Li signed equity transfer contracts with Zhang, Zhu and Sha, the Sanshui government froze the shares of Zhang to prevent Li from completing the share transfer process. On December 6, 2004, the government announced it would form a working group to take over Jianlibao. On the same day, the Foshan Sanshui Jianlibao Trading Co Ltd. was formed. SAIM was the sole shareholder. The next day, the six new board members appointed by Li Zhida were driven out of Jianlibao. Li, together with Zhu, accused the Sanshui government of "manipulating the take-over of Jianlibao" and "seriously trampling on the Constitution, corporate law and other relevant laws." Legal experts say it is understandable that the Sanshui government took measures to save Jianlibao from a crisis. But whatever measures it takes, it must abide by the law and respect the legitimate property rights of investors. If the government abuses its public power and damages the interests of shareholders, local investment environment will be in jeopardy. Analysts say the trading company organized by Jianlibao distributors and Sanshui government is not sustainable. Once the busy Spring Festival season ends, the company will likely see a decline in sales and profits, causing the distributor alliance to collapse. English version by Xin Zhiming