Fonterra looks for right formula with Beingmate

After being bruised by its previous Chinese partnership with Sanlu, the New Zealand dairy group seeks a 20% stake in another mainland group.

New Zealand dairy group Fonterra on Wednesday became the latest foreign company to partner with a Chinese firm in an effort to crack the market.

Fonterra will launch a tender offer to buy a stake of up to 20% in infant formula maker Beingmate, worth NZ$615 million (US$514 million).

While China is a big market, it is one where foreign companies have struggled to get the formula right and the big question is whether Fonterra can succeed after a past failed attempt.

The group previously held a 43% stake in Sanlu a state-owned Chinese dairy company that went bankrupt in 2008 after Chinese authorities found that it had added melamine to milk products. The scandal caused scores of infants to fall sick and resulted in six infant deaths.

There are benefits to the new partnership as Beingmate, based in Hangzhou, offers a distribution network that Fonterra won’t have to build from scratch, allowing it to distribute its own branded products.

“They have always been part of the Chinese market but, after the Sanlu issue, they have been present more as a bulk supplier of milk powder. Now they are getting back into the market with their own brands,” Torsten Stocker, a Hong Kong-based partner for consumer retail practice at consultancy firm AT Kearney told FinanceAsia.

“Beingmate gets a guaranteed source of raw materials, which is still an issue in China and gets to expand its portfolio of products,” he added.

The need to secure food and dairy safety in China is a key driver of deal activity in China. KKR on Tuesday said it was buying 14% of China’s largest chicken meat farmer Fujian Sunner Development for $400 million as demand for safe food spikes amid scandals.

In February, Danone, the French yoghurt maker, announced it was doubling its stake in China Mengniu Dairy from 4% to 9.9% for HK$5.1 billion (US$657 million), in a rare example of a foreign company raising its stake in a Chinese state-backed company.

Moving forward consultants expect more activity within the dairy sector, as China needs more milk and dairy products. "This is still an attractive space, you can invest in anything from agriculture to processing to branding," said Stocker.  "There will be continued investment but from different angles," he added.

Growing market

Through the partnership, Fonterra and Beingmate are vying for a piece of a growing and lucrative market. “The infant formula market in China is worth about NZ$18 billion today and expected to be worth NZ$33 billion by 2017,” said Fonterra's CEO Theo Spierings in a release.

“This growth is driven by increasing urbanisation, higher disposable incomes, a preference for premium brands, and relaxation of the one child policy,” he added.

The partnership includes Fonterra’s acquisition of an up to 20% stake in Beingmate, the establishment a joint venture in Australia to deliver high quality infant formula to Beingmate for Chinese customers and a distribution agreement for Fonterra’s Anmum infant formula product in China.

The joint venture, which is conditional upon regulatory approvals and due diligence, will acquire the Fonterra’s Darnum plant in Victoria, Australia. The plant will prioritise supply to the Chinese market and also supply to the rest of the world, Fonterra said in a release.

Beingmate will own 51% of the joint venture to satisfy Chinese regulatory requirements. The joint venture will be governed by a board, to which Fonterra and Beingmate will each appoint two directors. The chairman will be appointed by Beingmate. Fonterra will be offering Rmb18 for each Beingmate share.

Fonterra will also work with Beingmate to evaluate investments in dairy farms in China, the New Zealand company said. Separate from the partnership, Fonterra also said on Wednesday that it is investing $555 million to build a new milk powder drier in New Zealand's North Island.

Fonterra's partnership comes amid a rise in foreign inbound investments in China as multi-national companies refine their strategy in China and seek to strike alliances.

“The tie-up between Fonterra and Beingmate is notable in that this time it is not a Chinese food company buying into a foreign dairy company, as has been the case during the past few years, but the other way around,” said Carsen Wen, a partner at law firm Jones Day.

According to a slide by accounting and advisory firm PWC, the total value of foreign inbound M&A reached a record high of US$13 billion during the first half of 2014.

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