Fonterra buys 18.8% of China's Beingmate for about $755 million

Fonterra Cooperative Group [NZX: FCG], the world's largest dairy exporter, has acquired 18.8% of Shenzen-listed Beingmate Baby & Child Food, falling short of the stake of up to 20% it was seeking in a partial tender offer.

The transaction, valued at 3464 million RMB ($NZ755 million) is well above the $615 million Fonterra indicated it would cost for a 20% share last year when the deal was first announced. The transaction will close in the next few days.

Chief financial officer Lukas Paravicini said it was a good result, despite falling short of the original target.

"Over the next few weeks, Fonterra and Beingmate will now move ahead with the next phase of our partnership, which includes establishing a joint venture to purchase the Darnum plant in Australia and finalising a distribution agreement making Beingmate Fonterra's exclusive Anmum distributor in mainland China," he said.

Fonterra is buying 192.4 million shares at 18 RMB a share.

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 Annum infant formula brand.

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% fall in operating profit in its preliminary results for the 2014 financial year to 65.7 million yuan ($NZ13.9 million) compared to 721 million yuan the previous year. Revenue was also down by 17%.

At the time, First NZ Capital analysts Kar Yue Yo questioned why Fonterra had not commented in detail on Beingmate's decline in revenue and operating profit, which was a massive reversal of the positive performance it had recorded in the previous three years.

Fonterra responded in a brief statement saying Beingmate had signalled to the market that its 2014 result would be down on the previous year, and the cooperative had given this "due consideration" in its process to buy a 20% stake in the company.

Fonterra has previously said the Beingmate deal would be earnings accretive almost immediately if accepted.

The infant formula market in China is worth about $18 billion today and that's expected to grow to $33 billion by 2017.

Fonterra's latest global update released today said its New Zealand milk collection was down 7% in February compared to the same month in 2014 due to dry conditions that remain across most dairying regions, particularly in the South Island. Irrigation restrictions have been put in place for some Canterbury suppliers, the update said.

For the nine months ending February 28, Fonterra's milk collection was 1291 million kg/MS, 1.5% higher for the season to date. That compares to Australia where milk collection for the eight months to Feb.28 was up 5% on the same period the previous season to 91 million kg/MS.

(BusinessDesk)