The co-op is targeting up to 20% of shares in Beingmate Baby and Child Food, offering 18 renminbi a share in a public tender process. The deal also involves setting up a joint venture with Beingmate to buy Fonterra’s Darnum processing plant which produces infant formula and highly spec’d milk powders.
Fonterra will have two directors out of nine on Beingmate’s board.
The net cost of the share purchase and joint venture, once proceeds from the Darnum venture are included, will be $615m – all financed through debt.
Reports on Chinese financial market websites show both revenue and returns for the baby food company fell significantly in the first quarter when compared with the same quarter last year.
The numbers are in contrast with figures presented by Fonterra at the announcement of the venture that showed only previous full-year results with year on year gains.
Fonterra chief financial officer Lukas Paravicini said Fonterra had been aware of the numbers and anticipated volatility in revenues and earnings in 2014 but its focus was on longer term projections.
Beingmate, like many other Chinese dairy companies, experienced an inventory build late in 2013, he said.
“We are in a highly volatile market for dairy prices, with both highs and lows being tested. In looking at strategic investment decisions we look through the impact of this volatility to the fundamental drivers of value,” he said.
While he wouldn’t disclose details of Fonterra’s valuation process for the company, he said, as in any valuation, it had taken into account regulatory matters, growth, margin, and other factors including the current performance of the business.
‘What you see here is us investing absolutely and directly on strategy.’
Paravicini said the share offer price, although a 20% premium on the last traded price of 14.46 renminbi, was fair.
While he wouldn’t say what return Fonterra was targeting from the investment, extensive and intensive due diligence meant it was confident it would be beyond its cost of capital and be “earnings accretive” so it would be earnings-per-share positive in the first full year.
Fonterra chairman John Wilson said the board was very aware that, at a total of close to $1.8 billion, it was spending a lot of farmers’ money in the Beingmate deal and its $555m investment into building new processing capacity in New Zealand.
The spend-up would take Fonterra’s debt:debt plus equity ratio from 42.4% to 45.1%, still well within its target range of 45-50%.
“What you see here is us investing absolutely and directly on strategy,” Wilson said.
Returns from the Chinese move would come in the form of dividends from Beingmate, which has had a policy of paying out more than 50% of its profits as dividends but there would be other income benefits too, he said.
The joint venture proposal to buy Fonterra’s Darnum plant, hit in the fall out from the WPC80 botulinum scare, would boost returns from increased volumes of infant formula sold to Beingmate for its brands as well as other Fonterra customers.
Wilson said a shift into greater volumes of infant formula away from skim milk powder, which the plant also produces, would raise the value of outputs from the plant.
The joint venture company will be owned 51% by Beingmate and 49% by Fonterra to appease Chinese regulators, but the plant will be run by Fonterra.
Expectations are for 50,000 tonnes of product to flow from Darnum to China.
Fonterra’s investments in Europe also stand to benefit from the Chinese move with increased volumes of 30,000t of whey products coming from Fonterra’s partnerships with A-Ware and DairyCrest and going to China.
Wilson said one of the most significant benefits of the Beingmate investment would be the acceleration of Fonterra’s value added strategy in China through a licensing agreement with Beingmate.
Licensing Anmum – both its infant formula and maternal products – to Beingmate would immediately open up a huge distribution network with the aim to rapidly lift sales and increase returns for the brand to $100m a year by 2018.
Production of Anmum products would remain in New Zealand with capacity at Fonterra’s specialist processing plants able to cope with projected production increases, Wilson said.
But he’s not ruling out the possibility of the co-operative’s brand darling eventually being manufactured offshore or in China.
“There is the potential for Anmum to be produced in China using milk from our own farms but right now the Anmum brand is positioned in the market as a NZ milk brand made from Fonterra NZ milk. We might migrate manufacturing out of NZ in the future but it’s not part of the consideration today. We don’t see the need to do that.”
Fonterra had held preliminary discussions with Beingmate about building a dairy farming hub together to supply milk to Beingmate.
The Chinese company already had its own dairy farms and Fonterra was in the process of building its second hub, having recently announced a third hub with Abbot – also a significant infant formula producer.
Current plans are for 1b litres of milk across the three hubs. Milk from Fonterra’s farms goes to other processors but Spierings said it was likely to be channelled into its own UHT operations there eventually.
Wilson has indicated the venture with Beingmate may result in the development of new products for the Chinese market and together the two companies may look at other opportunities in Australia.
Main points
In New Zealand
$555 million investment in processing
Lichfield
4.4m litre/day, 30 tonnes/hour powder drier
Edendale
1.85m litre/day expansion
Milk protein concentrate plant
Reverse osmosis plant
Anhydrous milk fat plant
In China and Australia
Buy up to 20% of Beingmate
Joint venture with Beingmate to buy Darnum, Australia
Cost $615m net of Darnum proceeds
Anmum distributed through Beingmate in China
Target annual Anmum sales at greater than $100m/year by 2018
Beingmate has:
More than $1b turnover
10% of Chinese infant formula market
80,000 retail outlets
20,000 maternal service consultants
