Fonterra confident $755m price tag for Beingmate stake is good value
Fonterra Co-operative Group [NZX: FCG] said the $755 million price tag for 18.8 percent of Shenzen-listed Beingmate Baby & Child Food represents good value and will deliver long-term value to the world's largest dairy exporter.
The transaction, valued at 3,464 million RMB ($755 million) is well above the $615 million Fonterra indicated it would cost for up to a 20 percent share last year when the deal was first announced.
But chief financial officer Lukas Paravicini said the $615 million was a net figure, once the proceeds from the sale of Fonterra's under-utilised Darnum plant in Australia into the joint venture it's setting up with Beingmate are taken off the purchase price.
There have also been currency fluctuations since the deal was first announced last August that have bumped up the price.
Paravicini said he's not sure why the offer of 18 RMB per share wasn't taken up by more Beingmate shareholders, although they may have been hoping for a higher price. Fonterra is understood to be paying a 12 percent premium for the Beingmate stake.
Prime Minister John Key said at his post-Cabinet press conference that the deal was a "good thing and shows investment goes both ways" between New Zealand and China. Key told the India New Zealand Business Council summit last Friday that increasing trade with India, which has one of the world's fastest-growing economies, would prevent New Zealand becoming "too China dependent".
Grant Williamson, a director at brokerage Hamilton Hindin Greene, said investors view the move as positive for Fonterra in the bigger picture.
"That they're tying up with a very large Chinese manufacturer is a pretty strategic investment for them."
Fonterra and Beingmate announced the intended global partnership last August to help meet China's growing demand for infant formula and increase export volumes of Fonterra's Anmum infant formula brand. Paravicini wouldn't reveal how much Anmum exports were expected to increase by under the deal, other than to say there should be a "significant uplift".
Fonterra launched Anmum in the southern Chinese city of Guangzhou late 2013 and has since extended sales to around 100 stores in Chengdu and Chongqing in January. It is also available in Hong Kong.
Paravicini said the plan was to introduce it progressively to China's larger tier one cities where foreign brands are more well-recognised and trusted.
"It has had good success on a small scale. With Beingmate we will get scale quickly," he said,
The partnership will create a fully integrated global supply chain from the farm gate direct to China's consumers, using Fonterra's milk pools and manufacturing sites in New Zealand, Australia, and Europe. The Chinese government last year imposed stricter regulations on products such as infant formula amid concerns over food safety.
Beingmate last month reported a 90 percent fall in operating profit in its preliminary results for the 2014 financial year to 65.7 million yuan (NZ$13.9 million) compared to 721 million yuan the previous year. Revenue was also down by 17 percent.
Paravicini reiterated earlier comments that Beingmate had signalled to the market in the second and third financial quarters that its 2014 result would be significantly lower .
"Beingmate is a publicly listed company in China and has obligations to the market so in that sense, this was no surprise. We had given it due consideration and taken a long-term view on what this partnership would deliver."
Beingmate is due to report its final results next month.
The deal will immediately be earnings accretive as originally stated, Paravicini said.
The next steps are to finalise the shareholders agreement with Beingmate that will see Fonterra two directors to the board, establish the joint venture company that will purchase the Darnum plant in Australia, and then finalise the distribution agreement making Beingmate Fonterra's exclusive Anmum™ distributor in China.
The Fonterra Shareholders' Fund traded up 1 per cent today to $5.89.