A renewed push by the Chinese government to consolidate the country’s dairy industry could spur a new round of deal making and capital raising in the sector.
Chinese regulators expect consolidated companies will have better control over their supply chains, the fragmentation of which experts cite for repeated food-safety scares. China’s dairy supply chain continues to be dominated by small farms.
China has been pushing to restructure its domestic dairy industry since the melamine scandal in 2008, when the chemical was found in infant formula made by 22 companies. Thousands of children were sickened and six died.
The country now aims to create a small pool of national dairy heavyweights that control product lines including milk powder, infant formula and raw milk, as well as a greater proportion of dairy-product processing.
The government plans to form about 10 large milk powder companies, each with annual revenue of more than two billion yuan ($323 million) by the end of this year. The number will fall to five by 2018.
China’s State Council also announced in June a plan to push further consolidation in the country’s infant-formula industry. That couples with the China Food and Drug Administration’s decision to pull production permits from more than one-third of the country’s infant-formula makers. The government has said it wants to reduce the sector to 50 manufacturers by 2018, from about 133 that had applied for the new production permits.
Meanwhile, raw milk producers continue to consolidate, too. According to data from Malaysian brokerage CIMB, the number of farms with a dairy herd of more than 1,000 cows reached 18% in 2013 in China, compared with 5.54% in 2008. The number of farms with just one to four cows, meanwhile, fell to 20% in 2013 from 32.42% in 2008.
China’s food-safety scares have prompted a surge of imported dairy products, such as infant formula from overseas, to the detriment of domestic producers. And amid restructuring, smaller farmers are exiting the industry, which has caused a drop in raw-milk production in China. At the same time, demand for dairy products from Chinese consumers continues to increase at a greater pace than domestic production.
That could encourage bigger dairy-product makers, for example, to acquire raw milk producers to integrate their supply chains.
«The government’s recent policy directive aims to enhance the food-security issues in China’s dairy sector by supporting the more-integrated players,» said Brian Gu, co-head of investment banking for China at J.P. Morgan Chase & Co. «It’s a very competitive market and players with weaker positions will be challenged and potentially consolidated.»
China’s State Council has said that it will provide financial support, such as offering lines of credit, to promote mergers and acquisitions in the industry. Meanwhile, investors—likewise encouraged by China’s rising demand—are putting money into companies that they believe will emerge as winners from the latest round of restructuring.
Deals in the sector have gathered pace as a result. In 2013, China’s dairy sector had about 10 mergers and acquisitions, totaling $3.2 billion, according to Dealogic. In 2014, 15 such deals have been announced, with total deal value at more than $2 billion. The biggest of these deals this year was Beijing government-backed dairy company Beijing Sunlon and Shanghai-based conglomerate Fosun International Ltd. 0656.HK 0.00% ‘s purchase of a stake in dairy-product maker Beijing Sanyuan Foods Co.600429.SH -1.66% Ltd., announced in February, for $653 million.
Though consolidation may improve food-safety standards, foreign firms that made past investments in China’s dairy industry may still be wary and avoid settling for minority stakes, said David Mahon, managing director of investment consultancy Mahon China Investment in Beijing. Private equity could prove a more viable spigot than other forms of fundraising, he said.
Among recent high-profile private-equity deals was Alibaba Group Holding executive chairman Jack Ma’s $320 million investment through his fund Yunfeng Capital in a unit ofInner Mongolia Yili Industrial Group Co. 600887.SH +0.54% , the third-biggest dairy farming company by herd size in China, according to CIMB data.
Capital markets could also see more deal activity, particularly in Hong Kong, where a number of Chinese dairy companies have recently raised money on the stock market. By tapping public markets, these dairies will have more money to improve safety standards and lift production. The winnowing of smaller dairies also leaves room for their entry.
Three Chinese dairy companies have gone public, or raised equity in Hong Kong since 2013, according to Dealogic. The biggest of these was an initial public offering by China Huishan Dairy Holdings Co. 6863.HK +2.75% Ltd. in September which raised $1.5 billion. YuanShengTai Dairy Farm, one of China’s biggest raw milk producers, raised $452 million in a November IPO. Coming up, Inner Mongolia-based China Shengmu Organic Milk Ltd., started premarketing for a $300 million IPO last month with an aim for a July listing in Hong Kong. The Wall Street Journal also reported in April that Beijing Sunlon is planning a $300 million to $500 million IPO in Hong Kong this year.
Summer Wang, an analyst at brokerage Bocom International in Hong Kong, says she expects more dairy companies to tap capital markets for equity this year as the Chinese dairy industry races to catch up with demand.
Source: WSJ
