Since the start of 2019, the dairy industry has seen a wave of major mergers and acquisitions. First, Inner Mongolia Yili Industrial Group Co., Ltd. (Yili) announced the acquisition of 100% of New Zealand dairy cooperative Westland Co-operative Dairy Company Limited, followed by Henan Kedi Dairy Co., Ltd. (Kedi Dairy) planning to buy 100% of Henan Kedi Quick-Frozen Food Co., Ltd. (Kedi Quick-Frozen), and days later, New Hope Dairy Holdings Co., Ltd. (New Hope Dairy) announced the acquisition of 55% of Fuzhou Aoniu.

In fact, there were already multiple dairy M&A cases in 2018, and in 2019, the pace has accelerated. Behind these seemingly unrelated M&A events, what survival circumstances do dairy companies reflect?

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In the Second Wave of M&A Dairy Giants Are Buying Up Since the beginning of this year, several large dairy companies have been busy with M&A. What is the logic behind this?

On the evening of March 18, 2019, Yili announced that its wholly-owned subsidiary Jingang Holdings would acquire 100% of New Zealand's second-largest dairy cooperative, Westland Co-operative Dairy Company Limited, for a total equity consideration of no more than NZ$246 million (approximately RMB 1.134 billion), to further expand its global reach.

On the evening of April 17, Kedi Dairy issued an announcement stating that it planned to purchase 100% of the shares of all shareholders of Kedi Quick-Frozen through the issuance of shares, with the transaction price tentatively set at RMB 1.48 billion. The company's stock resumed trading on April 18.

On April 22, New Hope Dairy announced that on April 19 it signed the "Fuzhou Aoniu Investment Framework Agreement" with Fuzhou Jianshi Food Co., Ltd. and Ye Songjing, the actual controller of the "Aoniu" brand assets and business. The latter promised to place the operating assets and business related to Fuzhou Jianshi Food Co., Ltd. and its "Aoniu" brand into newly established animal husbandry and dairy companies, respectively, as acquisition targets for the company. The company will acquire 55% of the new companies.

Regarding these consecutive major M&A events, dairy expert Song Liang told China Business News reporters that these M&A cases reflect the increasing market concentration in the dairy industry, with leading dairy companies performing better and competition intensifying. In this context, each company's M&A is a strategic layout for future competition, addressing gaps in their supply chains.

Specifically, Song Liang said that Yili, as a leading dairy company, has to expand vertically and improve its supply chain system to lay a foundation for future international competition, especially against the backdrop of a not-so-good macro environment and declining consumption of high-end dairy products. Specifically, acquiring the New Zealand dairy cooperative can provide milk sources for Yili's expansion in the Southeast Asian market. New Hope, which had previously listed to raise funds for expansion, naturally made M&A its first move after listing. After establishing its position in the southwest region, New Hope will definitely expand to the southern China market, but the leading companies there are strong, so New Hope can only choose to acquire a relatively weaker company. Kedi Dairy's M&A is a helpless response to the downward pressure from first-tier dairy companies and the siege of foreign dairy companies, as well as its own sluggish performance.

In fact, the dairy M&A wave had already appeared in 2018. Data shows that on January 15, 2018, Fosun, together with Beijing Sanyuan Foods Co., Ltd. (Sanyuan), acquired French plant-based food manufacturer Brassica Holdings for EUR 625 million (approximately RMB 4.939 billion), while also assuming some company loans.

On December 20, 2018, Xinjiang Tianrun Dairy Co., Ltd. (Tianrun Dairy) announced that it would acquire 30% of Xinjiang Tianrun Beiting Animal Husbandry Co., Ltd. held by Fukang Fukai Agricultural, Industrial and Commercial United Company for RMB 9 million. On December 25, 2018, Yipin Dairy Co., Ltd. (Yipin Dairy) invested nearly RMB 100 million to formally acquire a Spanish milk powder factory, thereby achieving its layout in Europe.

Song Liang told China Business News reporters that the current dairy M&A is in the second wave of dairy M&A. The trend began in 2017 and became apparent in 2018. The purpose of this wave is to improve supply chain systems and build a more competitive system. The first wave was from 2011 to 2014, when the main purpose was to meet market demand and achieve the goal of going global. The purposes of these two waves are different: first to solve the problem of "having," then to solve the problem of "quality."

Behind the Industry M&A Wave Regional Dairy Companies Show Mixed Performance Behind the "hot" buying spree, the survival status of regional dairy companies varies, with some happy and some worried.

It is undeniable that the initial results of dairy M&A are relatively optimistic. For example, Sanyuan's 2018 annual report shows revenue of RMB 7.456 billion, a year-on-year increase of 21.8%; net profit of RMB 180 million, a year-on-year increase of 137.25%. In addition, Hong Kong Sanyuan Foods Co., Ltd., whose main business is investment management and the operation of its French subsidiary's products such as spreads and soy yogurt, achieved operating revenue of RMB 893 million and net profit of RMB 30.99 million in 2018.

Tianrun Dairy's 2018 annual report shows revenue of RMB 1.462 billion, a year-on-year increase of 17.89%; net profit of RMB 114 million, a year-on-year increase of 15.19%.

However, not all regional dairy companies are performing as well as Sanyuan and Tianrun. Many regional dairy companies are experiencing sluggish growth or even decline. Data shows that Kedi Dairy achieved revenue of RMB 1.285 billion in 2018, a year-on-year increase of 3.76%; net profit of RMB 129 million, a year-on-year increase of 2.05%, achieving slight growth.

Another regional dairy company, Guangdong Yantang Dairy Co., Ltd. (Yantang Dairy), achieved revenue of RMB 1.297 billion in 2018, a year-on-year increase of 4.68%; net profit of RMB 52.108 million, a year-on-year decrease of 53.61%. This is also the first time in five years that Yantang Dairy has seen a decline in net profit.

Regarding the current survival difficulties of regional dairy companies, data shows that the current Chinese dairy market is fully competitive, relatively oversupplied, and internationalized. Therefore, regional dairy companies face the downward pressure of first-tier leading dairy companies and the siege of foreign dairy companies, making life difficult. Many small regional dairy companies, including Kedi Dairy, lack the strength for product R&D and promotion, and channel reform requires substantial funds, so they have to seek new ways out.

For regional dairy companies that have adhered to a differentiation strategy focusing on low-temperature milk, Song Liang said that in the past, many regional dairy companies sought differentiation through low-temperature pasteurized milk. But now, with the entry of large dairy companies such as Yili, Mengniu, and Fonterra, the concentration of the low-temperature milk market is increasing, and the integration of China's low-temperature milk market has begun. In this process, large companies have more abundant funds and stronger milk source construction, leaving little space for regional dairy companies. In the future, leading dairy companies will further integrate regional dairy companies. In this context, New Hope Dairy's pursuit of cross-regional M&A is inevitable.

In addition, regarding the mixed performance of regional dairy companies in 2018, Song Liang believes that the key is whether they have products recognized by the market. Tianrun Dairy's yogurt is well received in the East China market, and New Hope Dairy's performance growth also comes from the stability of its southwest region business and the growth of low-temperature yogurt business in East China. However, Kedi Dairy's previous big single product, Xiaobai Milk, has been crushed by leading dairy companies like Yili and Mengniu, and it currently lacks products recognized by the market.

Source: China Business News / China Business Network

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