Fonterra to offer at least 20% premium for Beingmate shares in deal to drive Anmum sales

Wednesday 27th August 2014

Fonterra Cooperative Group will offer a premium of at least 20 percent for a one-fifth stake in Beingmate Baby & Child Food as part of a $615 million investment in a partnership to drive baby food sales into China.

Fonterra will offer 18 yuan a share for Beingmate stock in a partial tender offer that will be supported by chairman Wang Zhentai, who will sell down his stake to about 33 percent in the transaction.

Based on Reuters data, Beingmate has 1.02 billion shares on issue, suggesting the offer values the Chinese company at 18,360 billion yuan and Fonterra would pay 3.67 billion yuan, or NZ$714 million to build a 20 percent stake. The shares last traded at 14.36 yuan before being halted from trading, according to Reuters data.

Lukas Paravicini said a 20 percent premium "is a fair price for a 20 percent stake." Beingmate has about 10 percent of China's infant formula market and had earnings before interest, tax, depreciation and amortisation of $191 million in 2013, on sales of $1.185 billion, according to a Fonterra presentation.

The other element of the deal is Fonterra's Darnum plant in Victoria, Australia, which has annual capacity of 50,000 metric tonnes of infant formula. Fonterra will pour the plant into a joint venture with Beingmate, of which it will hold 49 percent to Beingmate's 51 percent. Fonterra will appoint two directors to the JV and Beingmate three, including the chairman.

The Auckland-based dairy company has announced a total of $1.17 billion of investments today, including a $555 million expansion in drying capacity in New Zealand. It will debt-fund the investments, lifting gearing, on a pro forma basis, by 2.7 percent to 45.1 percent in 2015, compared to gearing that was otherwise forecast at 42.4 percent, based on a company presentation today.

The deal signals Fonterra has decided it can't go alone in selling its Anmum maternity and infant formula products into the company's largest market. Under the partnership, Fonterra will licence the Anmum brand exclusively to Beingmate in China, where it has access to 80,000 outlets, and receive royalties. Its benefits include its share of dividends paid by Beingmate, which have been 50-60 percent of profits, and sell raw milk to the Darnum plant, which Fonterra will continue to operate.

The Darnum venture will also make sales to other countries. The two companies will also evaluate joint investments in dairy farms in China.

The infant formula partnership would mark the first significant tie up in that market since the disastrous San Lu venture that failed amid a tainted milk scandal in 2008.

Chief executive Theo Spierings said Fonterra is "completely different" from what it was five to six years ago, while China's food safety rules have been overhauled since the melamine scandal.

"We're very focused on learning from the past and moving on," he said.

"Our partnership with Beingmate will show the benefits of an integrated and secure supply chain, starting in New Zealand - our number one milk pool - where we are fast-tracking investment in milk processing capacity to meet global demand," Spierings said in an earlier statement.

Beingmate's Wang said the proposed partnership "is well-aligned with the Chinese government’s desire to see a strengthened focus on quality and consumer safety in the local dairy industry."

In a separate announcement today, Fonterra said it will invest in a 4.4 million litres-a-day drier at Lichfield in South Waikato while adding three new plants at its Edendale site in Southland that will produce milk protein concentrate, a reverse osmosis plant that will increase capacity on an extra drier by 300,000 litres a day and an anhydrous milk fat plant with a 550,000 a day capacity.

The company also affirmed its forecast farmgate milk price payout for the 2014/2015 season at $6 per kilogram of milk solids.

BusinessDesk.co.nz

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