Confidence in plant plans

ANDREA FOX
Last updated 05:00 21/06/2013

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The effects of a $2 billion takeover deal between two big Chinese dairy food producers on plans for a $220 million infant formula processing plant in north Waikato's Pokeno are still unclear, but given China's hunger for a safe protein source and the advanced stage of plans, it seems unlikely the project's new owner will retreat from the proposal.

Yashili International, which imports milk from New Zealand, was yesterday reported to have been sold to China Mengniu Dairy, partly owned by the Chinese Government, in a deal worth about HK$12.5b (NZ$2b) as part of a plan to expand its milkpowder business.

Yashili, one of China's top three producers of infant formula for the domestic market, has formed a subsidiary, Yashili New Zealand Dairy, which has been cleared by New Zealand's Overseas Investment Office to buy the Pokeno land for the plant, which it has said will create about 120 jobs.

The deal marks the latest step by China's milk industry to consolidate the market after several tainted-milk scandals tarnished the sector.

Hong Kong-listed Yashili, with a market value of US$1.5b (NZ$1.8b) , is 52.19 per cent controlled by a holding company controlled by chairman Zhang Lidian and 24.39 per cent owned by Washington DC-based Carlyle, one of the largest private equity firms in the world.

Mengniu is 19 per cent owned by China's state-backed agricultural and food industry supplier, COFCO.

Pokeno project manager for Yashili, Terry Norwood, last night said that until he received documentation of any change he was in no position to comment on the Pokeno proposal, though he was aware residents would have questions.

Yashili's investment in the Pokeno land has New Zealand Government approval.

Applications for consent for land use and air discharge are now being considered by Waikato local authorities.

For Mengniu, which also recently announced an investment by French dairy group Danone, the purchase will strengthen its foothold in the milkpowder segment, which currently contributes less than 2 per cent of its revenues.

Mengniu, twice hit by accusations it sold tainted milk, agreed last month to buy 26.92 per cent of China Modern Dairy Holdings from private equity firms KKR & Co LP and CDH Investments.

That deal allowed Mengniu, whose liquid milk products rank first in China by sales volume, to ensure control over its milk supplies and win confidence among consumers.

China's infant formula market is expected to grow to US$25b by 2017, Euromonitor data shows, as more mothers join the workforce.

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China's hunt for safe milk powder for its people has intensified since a fatal infant formula milk scandal in 2008 that involved Chinese traders substituting the chemical melamine into infant formula to increase profits on the product.

Trading in shares of Mengniu, based in Inner Mongolia, and Yashili were suspended in Hong Kong last week.

Liquid milk products contributed 89.6 per cent of Mengniu's 36.08 billion yuan (NZ$7b) revenue in 2012, icecream products 8.8 per cent and milkpowder products 1.6 per cent.

Mengniu teamed up with Danish-Swedish dairy group Arla Foods in June last year to develop dairy products in China, in another bid to regain consumer confidence.

Last month, Mengniu struck a deal with France's Danone, the world's largest yoghurt maker. Danone will also set up a joint venture with Mengniu for the production and sale of yoghurt in China. Danone will own 20 per cent of the business.

- © Fairfax NZ News

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