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The average Holstein Friesian cow can grow to 600 kilos, stand 150cm tall, and produce as much as 10,000 litres of milk a year. They can calve after 24 months, and produce milk for as long as 15 years.
Bovine biology may not appear to be obvious required reading for Asia’s investment bankers, but thanks to China’s rapidly growing thirst for milk products, the region’s dairy sector is in the midst of a wave of dealmaking, driving up asset prices from New Zealand to Inner Mongolia.
Milk is already big business in China, and it is getting bigger. Macquarie expects Chinese dairy consumption to rise at a compound rate of 13 per cent a year between now and 2017, while high-end milk products are likely to see 20 per cent annual growth rates.
Because of the capital intensity of the sector, and the overhang from years of safety concerns, domestic dairies are struggling to catch up with demand.
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International groups are picking up some of the slack, prompting them to increase their own supply base, and strike deals with Chinese dairy companies. In May, France’s Danone announced a joint venture with China Mengniu to produce yoghurt.
The flood of interest in the sector has raised some questions as to whether buyers and investors are overpaying for a seat at the table.
On Tuesday, Warrnambool Cheese & Butter, an Australian-listed dairy company, advised its shareholders to accept a US$424m takeover offer from Canada’s Saputo, amid interest from two Australian bidders, and Japan’s Kirin.
Earlier this week, Mengniu – China’s largest dairy by sales – announced it had sold a stake in Yashili, the baby formula producer, worth more than $200m to investors including Temasek and China’s Hopu Investment.
The deal marked the return to the private equity scene of Fang Fenglei, one of China’s best known financiers. Shares in Yashili, which had been suspended since August, rose more than 20 per cent after the announcement.
The same day, YuanShengTai, a “premium” raw milk producer based in northern China, filed its prospectus at the Hong Kong exchange, where it hoped to list a stake worth about $500m.
YuanShengTai will seek to build on the success of Huishan Dairy, which raised $1.3bn from its initial public offering in September, and attracted cornerstone investors including Norges Bank, the investment arm of Norway’s central bank. While some fund managers questioned the pricing of the deal at the time, the stock has since risen more than 20 per cent.
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Saputo’s A$8 a share offer for WCB implies a price/earnings ratio of about 20 times, and compares to a share price of less than $4 in July.
Listed Chinese dairies in Hong Kong now trade at a p/e ratio of between 22, in the case of Yashili, to 46 for China Modern Dairy, compared with an average of just 8 for the Hong Kong market. One banker described prices in the sector as looking “quite bubblish”.
But others say valuations have continued to rise because investable assets in the sector are increasingly hard to find, as evidenced by the shrinking size of the average deal.
In 2012, dairy product companies were the subject of more than $50bn of acquisition spending spread across 110 deals, according to Dealogic. This year the deal number is about the same, yet the amount of money spent has fallen to $7.3bn.
“The reality is there are few high quality assets out there,” said William Tang, head of consumer and retail group for Asia at HSBC. “The prior transactions highlight the supply and demand issue.”
Share prices moves have also supported the bull case for the sector. In May, Mengniu snapped up a stake in China Modern Dairy from KKR and CDH investments.
Since then, shares in China Modern have jumped more than 50 per cent, while Biostime, the Hong Kong-based producer of baby formula, has risen more than 150 per cent this year.
Source: FT
