In September 2015, Christine Holgate said there has never been a better time to be an Australian health products company.
The British-born chief executive of Blackmores, a leading Australian vitamins and supplements supplier, was speaking at a time when her company’s shares had soared by as much as five times in a matter of nine months. That was followed by another 50% jump in the next three months. By the end of the year, Blackmores was Australia’s most expensive stock.
The buying spree came at the height of skyrocketing Chinese demand for Australian healthcare products, as food safety became a top priority after a series of food scandals damaged confidence in local products. Middle-class Chinese in particular turned to Australian food products.
Holgate has said that China sales accounted for one-third of Blackmores' total revenue for the fiscal year ending June 2015, just two years after the company started selling into the world’s second biggest consumer market.
2015 was also the year when Chinese companies took the first step to acquire Australian health supplement suppliers in addition to buying their products.
In September, Chinese baby formula manufacturer Biostime International made an ambitious A$1.4 billion ($992 million) bid for Swisse Wellness, a 46-year old Australian brand and one of Blackmores’ main competitors in the nutritious supplement sector.
Another Australian healthcare product supplier fell into Chinese hands in less than a year later. Vitaco, which owns premium health and dietary product brands including Nutra Life and Healtheries, was taken over by Shanghai Pharmaceuticals and Chinese private equity firm Primavera in August last year.
That leaves Blackmores an obvious takeover target by Chinese companies. Sector analysts have widely speculated that a Chinese bidder would emerge, but Blackmores’ soaring valuation in late 2015 might have put many of them off.
The opportunity could be on the table again after a plummet in Blackmores’ share price. The company's market value has shrunk from a peak of $2.7 billion in late 2015 to $1.3 billion as of Friday. But with most of their funds parked onshore, there might only be a handful of Chinese companies able to write a billion-dollar cheque with offshore money.
Fosun Group, one of China’s most acquisitive conglomerates in recent years, is undoubtedly one of them.
Fosun shouldn’t emerge as a surprise buyer. According to sources, the privately-owned conglomerate was involved in the bidding for Swisse Wellness in 2015 under its subsidiary Fosun International, before eventually being outbid by Biostime.
The group, founded by high-flying billionaire Guo Guangchang, has also reportedly expressed interest in Pennsylvania-based and New York-listed health supplement distributor GNC. There is little doubt that the group is keen to add an internationally-recognised health product brand to its portfolio.
Taking over Australia’s largest vitamin supplier aligns well with Fosun’s strategy of proactive overseas acquisitions in recent years. The group has splashed out over $15 billion buying assets ranging from French vacation resorts owner Club Med and Portugal’s biggest lender Banco Comercial Portugues to British football club Wolverhampton Wanderers.
Any approach to Blackmores is however unlikely to be made through Fosun International, since the company has started selling off some of its assets to repay its soaring debt and restore its credit rating to investment grade level.
But Fosun Pharma does not have the same problem.
In fact, the Shanghai- and Hong Kong-listed healthcare company is well-positioned for M&A because it is the least financially-stretched among all Fosun subsidiaries. Its gearing ratio remains at a very healthy level at 26.8% as of the end of last year, which provides more than enough room for capital expansion.
And unlike Fosun International, Fosun Pharma is still on a spending spree. The company has just spent a whopping $1.26 billion to acquire an 86% stake in India’s Gland Pharma last year.
Purchasing Blackmores could help strengthen Fosun Pharma’s downstream commercial business in the pharmaceutical industrial chain, supplementing its already strong drug manufacturing and research and development business.
Fosun Pharma’s key products are generic and innovative drugs spanning a comprehensive range of treatment areas. Understandably, its products are sold to targeted customers, with hospitals and clinics being its biggest customers.
Blackmores and its nutritious products are the opposite. Its customers are the general public and its products are sold in shopping malls, in duty-free shops and through e-commerce platforms. As such, it is a perfect complement to Fosun Pharma’s existing operations.
But the most valuable aspect of Blackmores is international brand recognition. Buying the Australian company will add a regional nutritious food brand with products distributing across 16 countries in Asia. That is exactly what Fosun Pharma needs, for the company and its products are virtually unknown outside China.
Boost China sales
The potential M&A could be equally important to Blackmores. The company’s post-tax profit slumped 41% in the second half of last year, a disappointing result which Holgate attributed to changes in the way it channels its products into the Chinese market.
Historically, part of Blackmores’ China sales have been conducted through the grey market. The company relies on a group of overseas sales agents — known as 'daigou' in Chinese — to buy its products in Australia and ship them into China.
The reason behind adopting the daigou channel is simple. Through daigou, Blackmores can distribute its products outside the 12 designated cities and free trade zones that its products are allowed to be imported to under the direct sales route.
But Blackmores began to suffer in mid-2016, when Beijing moved to tighten regulations around imports through the daigou route. As a result, the daigou market shrank substantially and goods sold through the channel — mostly luxury and nutritious food products — took a severe hit.
Finding a Chinese owner could allow Blackmores to bypass some of the import restrictions currently imposed on Australian companies. That could help it catch up with Swisse Wellness, which said it will expand its China presence through direct sales in physical stores and rely less on e-commerce after integrating with Biostime.
Blackmores could leverage sales through Fosun Pharma’s own network of 660 retail pharmacies in China, as well as its relationship with Sinopharm Group, China’s largest pharmaceutical distributor (Fosun Pharma is Sinopharm’s second largest shareholder).
In addition, Fosun Pharma’s extensive hospital and clinic network could potentially be a new distribution line for Blackmores’ products.
From a regulatory standpoint, Australia’s Foreign Investment Review Board is not known for rejecting Chinese buyers for the nation’s assets other than land and mines. If Fosun Pharma can present to Blackmores’ board of directors a proper strategy to help the company expand in China, it certainly stands a higher chance of success than other prospective buyers among China’s state-owned enterprises.
What if… is a column that analyses unusual M&A ideas in Asia. These deals might not take place — but perhaps they should.