Chinese food companies have been snapping up foreign producers of processed and raw foods, spurred on overseas by the relative lack of arable land and clean water at home and the demands of China’s vast and increasingly affluent population.
In September, Shuanghui International completed its record $4.7 billion purchase of Smithfield Foods and is now aiming to raise up to $6 billion in a Hong Kong IPO, which would value the company at around $20 billion.
It was the biggest-ever Chinese takeover of a US public company, combining the world’s largest pig producer with China’s major meat processing firm Henan Shuanghai Investment & Development.
The high-profile deal is part of a broader trend. There were 10 outbound M&A transactions by Chinese food companies worth over $8 billion in 2013 (year-to-30 November) compared with eight worth $1.67 billion in 2012 and nine worth 717 million in 2011, according to data compiled by Dealogic. This year foreign acquisitions in the food sector have made up 12% of total Chinese overseas purchases, much higher than in 2012 (2.6%) and 2011 (1.3%).
“The drive for securing its food supplies has been an objective of Chinese policy makers and companies for several years. It has been evident in overseas acquisitions by companies in the dairy sector and investment in arable land throughout the world, including Europe and Australasia,” said Jason Rynbeck, vice chairman of M&A across the Asia Pacific region at Barclays – a bank that advised Smithfield during the Shuanghui takeover.
China has only 9% of the world’s farmland but its 1.36 billion population consumes about 20% of its food supplies, according to the United Nations. Annual per capita meat consumption in China is 58.2 kilos compared with 120.2 kilos in the US, according to the most recent data from the Food and Agriculture Organisation of the UN.
But with Chinese meat demand set to continue growing sharply as China’s middle class expands rapidly that gap is narrowing.
Domestic production of pork – China’s favourite meat – has been ridden with health and hygiene scandals. Last March, for example, thousands of dead pigs were found dumped in rivers near Shanghai. Also, the country’s mainly small private farmers are poorly regulated.
So it is hoped that the Smithfield acquisition will inject more reliable quality pork products into the supply chain and help spread better practices across China’s pork suppliers.
“Pork is a major source of protein in China but the industry is fragmented, inefficient and rife with unhygienic practices. Food inflation in 2006-2007 started with pork following a break-out of the disease, so it is in the interests of both the government and commercial enterprises to acquire more expertise to apply to the industry,” said Michael Spencer, chief economist and head of research, Asia Pacific, Deutsche Bank.
Although Shuanghai grabbed the headlines, China’s dairy industry has been in the vanguard of overseas acquisitions, partly to ameliorate the public relations damage caused by tainted milk scandals and to ensure better quality raw material.
In 2008, China’s authorities reported that six infants died and about 54,000 babies hospitalised after consuming milk products adulterated with melamine, a chemical that gives the appearance of higher protein levels. Leading dairy firms such as Sanlu, Mengniu, Yili and Yashili were implicated.
Aggressive dairy sector
China’s second-biggest food company Bright Food is considering buying Israel’s largest food manufacturer Tnuva Food Industries, following its purchase of a 60% stake in the UK cereal maker Weetabix earlier in the year.
Bright, a leading dairy firm and producer of foodstuffs ranging from Big White Rabbit candy to Aquarius drinking water, would gain access to raw milk as well as other dairy products as a result of the Tnuva purchase.
In the past Bright has made deals with New Zealand’s Synlait Milk and Australia’s Manassen Foods, among others.
Securing a reliable source of milk is important for China Mengniu Dairy, a leading manufacturer and distributer of dairy products based in Inner Mongolia, and in May, it formed a joint-venture with Danone, the French owner of Activia yogurt and Evian water.
“It will take time for the dairy sector to regain the trust of consumers following the tainted milk scandals. Middle income households are important buyers and they are less price sensitive and have been willing to pay extra for foreign milk products,” said Rynbeck.
Chinese dairy firms are nonetheless attracting investor support, not least because the authorities are keen to develop its indigenous industry.
The Chinese government has provided Rmb3 billion-Rmb4 billion ($493 million-$657 million) of subsidies to its dairy industry after concerns about price fixing by multinationals. Analysts at Barclays estimate that the industry’s revenues can grow by seven-to-eight times in the next decade.
Institutional demand for dairy stocks, after shares in China Huishan Dairy surged on the Hong Kong exchange in September, prompted Yuan Sheng Tai Dairy, a Heilongjiang-based raw milk producer, to lift the issue size of its proposed flotation from $200 million to $500 million.
