Mengniu, one of China’s largest dairy companies, has struck again in Australia, following its move for infant-formula maker Bellamy’s with a deal for Lion Dairy & Drinks. Dean Best looks at industry reaction.
Two months after swooping to buy infant-formula business Bellamy’s Australia, China Mengniu Dairy, one of the largest dairy companies in the Asian country, has this week announced another acquisition in Australia.
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Mengniu has struck a deal to acquire Lion Dairy & Drinks, part of the Australian food and drinks business Lion owned by Japan’s Kirin Holdings.
The AUD600m (US$406.6m) deal, if approved by Australia’s competition watchdog and by a board that rules on foreign investment into the country, would see Mengniu take on ownership of a business operating 13 manufacturing facilities and a portfolio of milk-based beverages, yogurt, white milk and plant-based products. The transaction also includes two joint ventures – Vitasoy Australia Products and Capitol Chilled Foods Australia.
The deal comes a year after Kirin put Lion’s dairy assets up for strategic review. In September, Canada’s Saputo acquired some of those assets, snapping up Lion’s speciality cheese business, including brands such as South Cape, Tasmanian Heritage and Mersey Valley.
Saputo was among a number of companies, including another Chinese dairy major Yili, linked in reports to bidding for Lion Dairy & Drinks, although no interested suitor publicly confirmed they were looking at the business, which has had its challenges in recent years in a challenging market for fresh dairy in Australia.
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By GlobalDataIn a stock-exchange filing, Mengniu set out three benefits of it adding Lion Dairy & Drinks to its portfolio.
First, Mengniu said Lion’s “high-quality assets” was “another important milestone in formulating a complete regional integrated player with a multi-category/multi-brands portfolio to serve consumers in Asia Pacific”. Mengniu pointed to Lion Dairy & Drinks’ “iconic dairy brands, with number-one market positions”. The company also touted Lion Dairy & Drinks’ “highly-regard Australian milk pool”, its factories and its “extensive cold chain distribution network”.
Mengniu insisted: “Together with the infant milk formula products offered by Bellamy’s upon completion of its acquisition by the group, this extensive business layout would equip the Group with a stronger foundation to excel in the Asia Pacific markets.”
Secondly, Mengniu claimed Lion Dairy & Drinks’ portfolio of brands – which include Dairy Farmers milk and Dare iced coffee – would be “well received by south-east Asian and Chinese consumers”. The brands, Mengniu went on, would give the new owner the ability to develop more “market-tailored, premium product offerings to customers in both existing and new markets”.
And, third, Mengniu sees an opportunity to manufacture its own UHT products in Lion Dairy & Drinks’ production facilities, leading to the “capture [of] the profit margin previously reaped by third-party services providers”.
On a related note, Mengniu also sees supply-chain benefits from bringing together Lion Dairy & Drinks with Bellamy’s and the Australian dairy-ingredients business Burra Foods, in which the Chinese group owns a majority stake.
“From a supply chain perspective, the collaboration between [Lion Dairy & Drinks], Burra Foods and Bellamy’s will potentially generate even greater synergies while providing better products to consumers across the Asia-Pacific region,” Mengniu explained.
Barney Wu, an analyst covering Mengniu at brokers Guotai Junan International Holdings, said Lion Dairy & Drinks’ pre-tax profits had recently come under pressure but predicted the deal could offer synergies to the Chinese group.
“Dairy & Drinks will help Mengniu procure more raw milk in Australia to alleviate increasing milk supply costs in China and unlock sustainable future growth. Australia is a source of high quality milk supply at competitive prices,” he said in a note to clients this week.
Wu also pointed to how Mengniu had been manufacturing the imported (into China) version of its Milk Deluxe brand. “The imported version of Milk Deluxe, which reported around CNY600m in sales, was produced in New Zealand via OEM arrangement, but it has lower gross margin compared to in-house production. Preliminary analysis indicates that Dairy & Drinks has excess capacity for in-house processing of Mengniu’s UHT products.”
Lei Yang, who covers Mengniu as executive director for China research at investment bank China Galaxy International Financial Holdings, also sought to highlight the potential synergy benefits. He believes the deal could be “short-term earnings accretive” for Mengniu.
“Dairy & Drinks has a stable supply of raw milk in Australia of about 825m liters per year. Mengniu currently sources about 80m liters of raw milk from New Zealand, which will be replaced by Dairy & Drinks’ raw milk supply in the future. Mengniu sees the potential to purchase up to 200m liters going forward. Based on [Mengniu’s] estimate, the raw milk price in Australia is CNY2.44 a litre, which is nearly 40% cheaper than China’s domestic price.”
However, not all dairy analysts in Australia believe Lion Dairy & Drinks’ manufacturing offers an ideal pool for Mengniu. “Lion does have a pool of milk but as a base for manufacturing, not an ideal one. It has a national footprint for milk supply including some highly stressed and high-cost regions in New South Wales and Queensland that has been focussed on fresh milk supply,” Joanne Bills, director of Australia-based dairy consultants Freshagenda, says.
Nevertheless, Bills does suggests Mengniu is taking on brands that could provide a boost to its portfolio, even if, broadly, she believes the overall rationale for the acquisition is unclear. “Lion does have some good brands in the dairy and plant milk space and a leading flavoured milk brand,” Bills says.
“We wondered if this was part of a play to get exposure to a developed retail market for dairy, as it doesn’t seem to be much of an exporting opportunity. It is hard to say – lots of people looked at Lion and passed so the strategy is not crystal clear to us. It may not be [Mengniu’s] last move in this part of the world.”
At China Galaxy International Financial, Yang argues Lion Dairy & Drinks does have “strong brands” that Mengniu could take into new markets. “Currently, only 2–3% of Dairy & Drinks’ revenue is export-related. With Mengniu’s strong distribution network, these products could be distributed in China and create upside,” Yang asserts.
At Guotai Junan International, Wu argues that, overall, the acquisition of Lion Dairy & Drinks is “consistent with Mengniu’s growth strategy and requirements for premium and international standards”, adding: “The acquisition of Dairy & Drinks provides a new pathway for sustainable growth in both room-temperature and chilled-foods business, as well as Asia Pacific market expansion.”
Whether Mengniu can eke out growth from the Lion Dairy & Drinks brands in Australia itself is an open question. More likely is incremental gains from launching the brands in Asian markets, although there will be stiff competition and significant investment in marketing needed.
In the short term, the most obvious benefit seems to be in milk supply and procurement, with Lion Dairy & Drinks set to add to Mengniu’s existing milk pools and offer possible gains on pricing and therefore margins.
