Glenboden M & A Originations

New Hope emerging as an acquisition candidate as China's dairy industry consolidates

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Origination Status buyer announcement of company acquisition, July 2007;
Asset Feichangniu Dairy Co. (Inner Mongolia);
Buyer New Hope Agribusiness Co. (China), domestic dairy, meat and feed group;
Seller province of Feichangniu;
Financial Terms rumoured total consideration of 100 mln RMB for 51% stake;
Buyer Rationale dairy consolidation, expansion into northern China;
Seller Rationale government directive preventing small dairies from making investments;
NBs New Hope has now made 12 acquisitions in the Chinese dairy industry since 2002.
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The Chinese dairy business is growing furiously, and has now become the second largest dairy market in Asia and the third biggest milk producer in the world. To put things in perspective, the country’s largest dairy group, Mengnui, has grown from nothing, in less than 10 years, to become a 21 bln RMB turnover giant ($ 3 bln), with 22 dairy units and top-line growth in 2007 alone of over 30%. Although Mengnui and its main rival Yili may never be M&A targets, there will be plenty of opportunities for you amongst smaller, independent, value –added producers, when China begins to open up to foreign strategic acquirors; New Hope is a good example of that.

Based in the south-west Sichuan province, and controlled by billionaire chairman Li Yonghao, New Hope is a listed food group whose dairy arm has grown, through acquisitions, into a 1,1 bln turnover business ($ 160 mln). In spite of that success, its chairman insists that its ‘still very small’, and will continue to grow aggressively, through acquisitions, to take advantage of recent Chinese government decrees which favour larger dairy enterprises.

To illustrate just how much potential there is in the Chinese dairy market, let’s take liquid milk. Mengnui, according to AC Nielsen, has a domestic market share of 40%, and is market leader. In 2007 it produced about 4 bln litres of liquid milk, with a sales value of 20 bln RMB. That means, roughly, that the Chinese market for liquid milk in total is 10 bln litres, translating into 50 bln RMB revenue for producers. Assuming that the trade has an aggregate 30% mark up, we can estimate the net retail value of liquid milk in China to be about 70 bln RMB, equivalent to $ 10 bln.

China’s population is about 1,3 bln. That suggests the average per capita consumption of (retail) liquid milk was less than 8 litres in the whole of 2007, which is only 20 ml daily per person. It also means that the average net retail price of milk, per litre, is only $1 equivalent. Even taking a correction for the fact that dairy consumption is not a staple in China, there’s enormous growth potential in that market in both volume and value terms.

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