Bright, Mengniu Cement Growing Global Ties
Bright Dairy (Shanghai: 600597) and Mengniu (HKEx: 2319) are rapidly emerging as China’s 2 dairy firms to watch as Beijing encourages consolidation in the scandal-plagued sector in a bid to create a handful of giants that can win back consumer confidence. Both companies have been in a steady stream of headlines over the last 2 days, showcasing their growing clout not only at home but also on the world stage. Bright is making news as it nears a deal to take a big stake in Israeli dairy Tnuva, and also as it receives big new funding from a global investor. Meantime, Mengniu is also making headlines as it boosts its growing ties with French giant Danone (Paris: DANO), and as its shares mark an important milestone on the Hong Kong stock exchange.
Each of these 2 companies has different strengths and weaknesses from an investor’s perspective. Bright looks like the more aggressive and entrepreneurial of the pair, having already made a number of major global acquisitions including its purchase of a controlling stake in British cereal maker Weetabix for more than $1 billion. But the company is also subject to political games in its hometown of Shanghai, meaning it may not always make the most prudent commercial decisions. Mengniu looks a bit more conservative and has chosen a good foreign partner in Danone. But it is controlled by an even bigger state-run enterprise, grains giant COFCO, meaning its behavior in many ways is being controlled by policymakers in Beijing.
All that said, let’s zero in on the latest news, starting with 2 large deals for Bright. The first of those first popped into the headlines last September, when media reported the company was in early talks to buy a controlling stake in Tnuva in a deal worth up to $1.6 billion. (previous post) The latest reports say talks are now in the advanced stages with Citigroup (NYSE: C) as an adviser, and that the deal could value Tnuva at up to $2.6 billion. (English article) The deal looks like a good one strategically, since Tnuva, like Weetabix, is a well known, healthy brand in its home market, and could probably expand into China and other global markets with Bright’s help.
Separately, media are also reporting that Bright is consolidating all of its dairy holdings into a single company, and that offshore investor RRJ Capital has agreed to give 1.5 billion yuan ($250 million) for a stake in the company. (company announcement) Bright would hold 55 percent of the company, to be called Bright Holstan, while the rest would be held by RRJ, an Asia-focused investment firm based in Singapore and Hong Kong.
Meantime, Mengniu was making its own headlines with word that Danone would pay 486 euros ($665 million) to more than double its stake in the company to nearly 10 percent. (English article) Danone and Mengniu first announced their partnership last May, when they formed a joint venture that ultimately gave the former 4 percent of the latter. (previous post) Danone said at the time it would boost its stake in the future if the tie-up went well, so this latest move indicates the pair are happy with the alliance so far. In smaller but also significant related news, Mengniu also got a boost when the compiler of Hong Kong’s Hang Seng Index announced it would add the Chinese dairy to the benchmark index from next month.
The bottom line in this flurry of dairy news is that both Mengniu and Bright are quickly emerging as leaders in consolidation of China’s dairy industry, and that both could be good investments for anyone looking for a China food play. Of course the downside is that politics will always play a role at both of these companies, and the danger of future food safety scandals always lurks in the background. But both have shown a desire to clean up their acts, meaning such risk could be relatively small.
Bottom line: The latest new foreign tie-ups by Bright and Mengniu show the pair are likely to emerge as leaders in China’s dairy consolidation, though risks remain due to both firms’ political ties.
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