Dairy Farm strikes $925m Chinese supermarket deal

Retail heats up as Dairy Farm enters Chinese supermarket business with an agreement to buy a 19.9% stake in Fujian-based Yonghui Superstores.
Yonghui operates almost 300 stores across China
Yonghui operates almost 300 stores across China

Asia’s retail sector continues to churn out M&A deal activity with Dairy Farm International agreeing on Monday evening to buy a 19.9% stake in Yonghui Superstores for Rmb5.7 billion ($925 million), marking its entry into China’s growing supermarket business.

Dairy Farm, which is part of the Jardine Matheson group, operates Wellcome, Hong Kong’s largest supermarket chain, as well as beauty chain Mannings, making it a key rival to Li Ka-shing controlled AS Watson, which operates supermarket chain ParknShop and beauty chain Watson. Dairy Farm also operates 7-Eleven convenience stores in Hong Kong, Macau, Singapore and Guangdong province, and has a small presence in the mainland through its Mannings stores.

“It is interesting that Dairy Farm is finally getting into China,” Torsten Stocker, a Hong Kong-based partner for consumer retail practice at consultancy firm AT Kearney told FinanceAsia. “They have a strong platform in Hong Kong and Southeast Asia but haven’t had much traction in China.”

The Shanghai-listed hypermarket and supermarket operator Yonghui is based in Fuzhou in China’s Fujian province . As at end December 2013, it operated 288 hypermarkets and supermarkets across 17 provinces, with over 60% of those supermarkets in Fujian and Chongqing, and most of the rest in Beijing, Anhui, Jiangsu and Henan provinces.

By taking a minority stake in a Chinese retailer, Dairy Farm is taking a leaf out of the books of other foreign retailers that have tried to expand in China on their own but failed. British retailer Tesco, which for years has been trying to expand into China, finally threw in the towel last year and inked a joint venture agreement with state-backed China Resources Enterprises, in which it took a 20% minority stake.

China’s retail market, while ripe with promise, has also proven to be a tough nut to crack and foreign retailers have struggled to make it alone, as was the case with Best Buy a few years back.

“China is a tough market, it is fragmented,” said Stocker, adding that he wouldn’t be surprised if other retailers that lacked scale looked at ways to exit the country.

The deal is the latest in Asia’s supermarket sector, which has been rife with activity, with several big-ticket deals struck during the past year.

Thai-listed company Berli Jucker, which is controlled by Thai tycoon Charoen Sirivadhanabhakdi, struck a deal last week to buy German retailer Metro’s cash and carry business in Vietnam for an enterprise value of €655 million ($876 million). Meanwhile, Thai retailer CP All bought cash and carry discount retailer Siam Makro from Dutch trading firm SHV for $6.6 billion last year.

After scrapping the sale of its supermarket chain ParknShop last year, Hutchison Whampoa in March sold a 24.9% stake in AS Watson to Singapore’s government-owned holding company Temasek for $5.6 billion.

Dairy Farm had been considering an entry into China for many years. “As a leading Asian retailer, Dairy Farm has for some time been looking for opportunities to participate in the large and high growth Chinese market,” said Dairy Farm Group chief executive, Graham Allan in a release. “This strategic partnership with Yonghui provides an attractive way to do that.”

Dairy Farm is subscribing for the shares at Rmb7 each, a 3% discount to the average 20-day volume weighted share price up to August 6, 2014.

Dairy Farm has also entered into a business cooperation agreement with Yonghui, which comes into effect immediately. Under this agreement, they will collaborate in procurement, private label product development, fresh food processing and store development.

The investment requires the approval of Yonghui’s shareholders and Chinese regulatory approval, which is expected to take at least six months.

Dairy Farm will have the right to nominate two directors to the board of Yonghui and one member to its supervisory board after regulatory approval of the transaction. It has the capacity to fund the investment through a combination of cash and new borrowings, the company said in a release.

Yonghui posted revenues of about $5 billion for the year ended December 31, 2013 and Ebitda of about $240 million and profit before interest and tax of about $160 million. It has been listed on the Shanghai Stock Exchange since 2010.

Yonghui will invest the funds from Dairy Farm’s investment to develop its stores, invest in supply chain infrastructure and for potential acquisitions, Dairy Farm said in a release.

Dairy Farm is a pan-Asian retailer and together with its associates and joint ventures operates more than 5,800 outlets, including supermarkets, hypermarkets, convenience stores, health and beauty stores, home furnishings stores and restaurants. It employs some 100,000 people, and had total annual sales in 2013 exceeding $12 billion. It has a 50% interest in the Maxim’s restaurant group in Hong Kong.

Dairy Farm is listed on the London Stock Exchange and has secondary listings in Singapore and Bermuda.

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