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May 31, 2010, 7:52 p.m. EDT

Pfizer Deal Highlights China's Clout

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By James T. Areddy And Dinny McMahon

SHANGHAI—One $50 million divestiture shouldn't mean much to a $68 billion globe-spanning merger. But in the case of Pfizer /zigman2/quotes/202877789/composite PFE +0.16% Inc.'s sale of a Chinese business, it highlights the growing influence of China's government over Western mergers and acquisitions.

Pfizer this week sold its Chinese swine-vaccine business to a subsidiary of a Harbin Pharmaceutical Group /zigman2/quotes/202194507/delayed CN:600664 +2.52% Co., which is based in China's northeast.

The transaction was designed to comply with a Chinese Ministry of Commerce antimonopoly review last year of Pfizer's merger with Wyeth. It offers more evidence of how Beijing intends to use its 2008 antimonopoly law to influence cross-border merger plans, a new hurdle for global deals.

Beijing is now interceding in mergers in a way similar to that of the U.S. and the European Union, which also required Pfizer to divest certain animal-health operations in their merger reviews.

Since the antimonopoly rules went into force almost two years ago, China has set conditions on at least five other big transactions, blocking one of them: Coca-Cola Co.'s $2.4 billion bid for a Chinese juice maker.

One Western lawyer who has worked in China for years said the country is becoming the "third pole of the antitrust review universe," even in deals where China's market is minimal. The Commerce Ministry is referred to as "MofCom."

MofCom determined that the combination of the two U.S. pharmaceutical makers would leave the merged firm in control of nearly half the Chinese market for certain swine vaccines, a lucrative niche in a nation of 500 million pigs.

The Pfizer deal is believed to be the first in which China required divestment of a local business.

The ministry didn't respond to a request for comment. A Pfizer spokeswoman said the divestiture was part of the regulatory approval process, but declined further comment.

Investment bankers said Harbin Pharmaceutical offered the highest price for the Pfizer business, which also attracted interest from Novartis /zigman2/quotes/203243705/composite NVS -0.87% AG and Eli Lilly /zigman2/quotes/200106384/composite LLY -0.33% & Co. Both Novartis and Eli Lilly declined to comment.

Yet, parameters set by the Commerce Ministry may also have made it most likely a Chinese buyer would emerge, people involved in the transaction said.

"There will be a lot of similar cases in the future," said Euan Rellie , a New York-based senior managing director of Business Development Asia LLC, an investment bank that represented Pfizer.

"Chinese authorities will use the new antitrust regulatory controls to protect emerging local players from what China sees as dominant international companies," he said.

The deal is narrow, relating to the technology for making and selling to China branded vaccines to combat mycoplasma hyopneumoniae, a strain of pig pneumonia.

The recent H1N1 influenza outbreak in humans, which was initially described as "swine flu," is a type A influenza but different from influenzas found in pigs, according to the U.S. Centers for Disease Control and Prevention.

Harbin Pharmaceutical will have access and training for three years to the Pfizer facility in Nebraska that produces and sells the vaccines and where its staff will be trained, a person familiar with the transaction said. The technology could provide Harbin Pharmaceutical a launch pad to produce other types of animal medicine.

The buyer is about 45% owned by an arm of the Harbin city government, as well as 22.5% by each of the U.S. private-equity firm Warburg Pincus LLC and Beijing-based Citic Capital Holdings Ltd., itself a venture of the country's sovereign wealth fund China Investment Corp. and state investment giant Citic Group.

"There's an open debate on whether MofCom is trying to protect domestic industry," said Ted Henneberry , a partner and antitrust specialist at Orrick, Herrington & Sutcliffe LLP, who wasn't involved in the Pfizer deal.

"But using these tools as a remedy would be looked upon favorably by companies that MofCom will try and fix things rather than just say no," he said.

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