Two years after the melamine-tainted milk scandal that killed at least six babies and made thousands ill, a Chinese milk company whose products were found to be contaminated with the toxic substance at the time, is testing the appetite for its products among equity investors.
Yashili International Holdings and its existing shareholders are looking to raise as much as $398 million from a Hong Kong initial public offering that will be used to fund its business development.
The company makes milk formula for infants, young children and expectant and nursing mothers and has a leading position in second- and third-tier cities in China. As of June 30, 2010, it primarily sold its products to more than 1,300 regional distributors, which sold them on to more than 80,000 retail outlets, including local grocery stores, regional retail chains, specialty stores and national retail chains across every province and autonomous region in the country, according to a preliminary IPO prospectus.
In September 2008 Yashili's products and those from 21 other Chinese domestic paediatric milk formula producers, including two Inner Mongolia-based dairy groups – China Mengniu Dairy and Yili -- were found to be contaminated with melamine, an industrial chemical used for making plastic.
Following the news of the scandal, which raised concerns about food safety in China, the share prices of Hong Kong-listed Mengniu Dairy and Shanghai-listed Yili nosedived. Sanlu, China's third-biggest dairy producer, was declared bankrupt in December that year. The World Health Organisation has said the incident was one of the largest food safety events it has had to deal with, and that the crisis of confidence among Chinese consumers will be hard to overcome.
Yashili incurred losses arising from the melamine scandal in 2008, primarily due to a Rmb787.1 million ($118 million at today's exchange rate) write-off of inventories and inventory disposal costs for the recalled products. It wrote off an additional Rmb1.3 million and Rmb1 million, respectively, for the year ended December 31, 2009, and the six months ended June 30, 2010, the company said.
One year after the milk scandal, Washington-based private equity investor Carlyle Group bought a 17.3% stake in Yashili. Financial details about the deal were not disclosed, but Carlyle said on its website that it will bring resources to help strengthen Yashili’s management expertise, enhance research and development capabilities and create a world-class quality control system.
Yashili is offering 644 million shares, including 89.1% primary and 10.9% secondary shares that are being sold by existing shareholder Zhang International Investment.
The shares are offered at an indicated price of HK$3.55 to HK$4.80 apiece, which suggests the company could raise between HK$2.28 billion and HK$3.09 billion ($295 million to $398 million). The deal comes with a 15% greenshoe option which, if fully exercised, will allow the company to sell an additional 96.6 million primary shares that will increase the potential proceeds to as much as $458 million.
About 90% of the shares are being offered to international investors, while the remaining 10% are earmarked for the Hong Kong public offering. The latter may be increased to as much as 50% of the total deal through a clawback.
The IPO price will be fixed on October 25 and the trading debut is scheduled for November 1. Bank of America Merrill Lynch, Citic Securities and UBS are joint global coordinators and joint bookrunners on the deal.
Established in 1983 and headquartered in the Guangdong province in southern China, Yashili operates dairy plants in the Guangdong, Heilongjiang, Shanxi and Henan provinces and employs more than 5,000 workers, according to the company's website.