Chinese baby formula manufacturer Biostime International’s purchase of a majority stake in Australian health supplement maker Swisse Wellness sends a key message to the market - the acquisition of quality overseas assets isn't just for big state-owned players anymore.
Guangzhou-headquartered Biostime, which had a market value of $1.1 billion before the deal was announced, has taken a big bite by acquiring a controlling 83% interest in the unlisted vitamin maker for A$1.4 billion ($992 million), equivalent to 22.5 times the target’s forecast earnings this year.
As the price tag values the Australian company at $1.2 billion, it means Biostime has effectively swallowed an entity that is bigger than itself.
Biostime outbid a number of big Chinese companies including Fosun International, COFCO, Shanghai Pharmaceuticals and Chinese private equity firm Hony Capital in an auction organized by Goldman Sachs, whose special-situation desk invested A$70m for a 0.3% stake in Swisse Wellness in 2013.
Swisse Wellness’ remaining 17% interest will be held by its management and founding members, including chief executive Radek Sali and Stephen Ring, the son of company founder Kevin Ring.
Hunting big game
Biostime has followed the footsteps of bigger peers like Bright Food, COFCO and Shuanghui International (now known as WH Group) to take over a foreign food company and establish an international footprint.
The deal is one of China’s biggest recent outbound M&A transactions in the food industry. In terms of value, it surpasses state-owned food conglomerate Bright Food’s $960 million bid for Israeli dairy giant Tnuva, and falls just short of Shuanghui International’s mega $4.7 billion acquisition of US pork supplier Smithfield Foods in 2013.
“It is a signature deal for China’s food industry because it shows that smaller companies are also capable of expanding overseas, both financially and operationally,” a person familiar with the company told FinanceAsia.
Overseas acquisitions by state-run enterprises could be made at the urging of Beijing to serve some political or economic agenda.
But deals by private companies like Biostime and Shuanghui show there is a growing need for foreign quality assets in the food sector, the person familiar with the company said.
Investors appear to have welcomed the Biostime-Swisse Wellness tie-up. The buyer’s shares rocketed more than 30% within half an hour after Hong Kong market opened on Friday before retreating shortly before market close. Shares were up 19.6% at HK$16.14 at the close, giving the company a market capitalisation of $1.27 billion.
Financial squeeze
Sources said the Swisse Wellness buy is a costly diversification that will put immense pressure on Biostime's short term cash flow.
Biostime's coffers will look almost empty after the mammoth transaction. The $992 million payment will be settled by its internal cash of HK$4 billion ($516 million), new share issuance of $36 million (equivalent to 3.3% of enlarged share capital) and a $450 million bridge loan provided by HSBC and ANZ.
That will leave approximately $10 million for the baby formula developer, though it still carries a debt of $322 million due to a zero-coupon convertible bond issue last year. Its debt/equity ratio is expected to reach 168% after completion of the acquisition.
Analysts are of the opinion that Biostime will have to raise additional capital via debt or equity within a year of the bridge loan’s expiry.
It is also worth noting that Biostime will have to bear the heavy marketing expenses for Swisse Wellness which entered into endoresement contracts with a number of international celebrities, including actress Nicole Kidman, cricket star Ricky Ponting and fast bowler Mitchell Johnson.
The selling, general, and administrative/sales ratio could increase by 6 to 7 percentage points to 43% assuming a A$50 million extra marketing budget every year, the source said.
Formula for success
In the long run the buyer could benefit from product diversification as the domestic instant milk formula business is getting increasingly competitive. This is evidenced by its 10.3% year-on-year decline in revenue and 34.4% decline in net profit in the first six months of the year.
“China’s infant formula market remained challenging [during the first half] with intensified competition. More brands have entered the market while existing players have increased promotional price discounting activities in order to maintain their market shares,” Biostime said in its interim result announcement last month.
As such, Swisse Wellness’ vitamin business will provide a new revenue stream for Biostime in a country where the penetration of health food products remains low. For the Australian vitamin supplier it is also beneficial because it can leverage on Biostime’s extensive sales and distribution channels, including roughly 42,500 pharmacies, sales organisations and baby specialty stores.
Meanwhile, Biostime’s growing e-commerce platform will be a core focus of the integration between the two brands, according to a second person familiar with the situation. In the first half of the year the company has a 1.3% market share in business-to-customer online infant formula sales.
In return the Chinese buyer could also foster a stronger relationship with consumer goods giant Procter & Gamble and Israel’s Teva Pharmaceutical through Swisse Wellness’ collaboration agreement with them, the second source said.
HSBC, which arranged Biostime’s IPO in 2010 and its CB offer in 2014, is the sole financial advisor for the Swisse Wellness acquisition.
