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Seven milk producers to bid for Sanlu at weekend

By Tu Lei (chinadaily.com.cn)
Updated: 2008-10-17 16:52

Seven milk producers, including Sanyuan, Wahaha and new competitor Yili, plan to bid for Sanlu Group Co this weekend, the company shamed in last month's milk scandal, according to today's International Finance News.

Some other large dairy producers were also reported to have shown interest in the deal, including American-owned Feihe Dairy, southwestern Sichuan Province's New Hope Group, and Wondersun.

But Mengniu Dairy Co Ltd, another milk giant, was excluded from the list for "its weak milk powder business", said experts.

Divergent Merger

Although government plays an important roll in this merger and Sanlu's resources attracts buyers, Sanlu's ruined brand and high debts worry possible bidders.

Shares of Shanghai-listed Beijing Sanyuan Food, a major dairy producer, were suspended on September 26 as it reportedly received a government notice to consider a Sanlu merger plan. Since then, there has been nothing new reported on Sanyuan's bid.

Experts explained the biggest difference lies in the purchasing way: either all-around stock purchasing or assets purchasing. Analysts said Sanlu and Sanyuan also differ in aspects such as their customer base, management style and marketing strategy, making integration difficult.

Wang Huaibao, member of the Dairy Association of China, said Sanyuan may not have much ability to recover Sanlu, adding Sanlu's complex assets structure, with 43 percent owned by New Zealand's Fonterra Cooperative Group Ltd, may mean assets are sold as a package.

Sanlu's sales revenue was 10 billion yuan ($1.46 billion) last year, about 10 times larger than Sanyuan's 1.1 billion. At the end of last year, the total assets of Sanlu were 1.62 billion yuan, compared to Sanyuan's 1.32 billion yuan.

Sanlu recalled 10,000 tons of tainted milk powder, and it has more than 700 million yuan worth of debts, not to mention money it could owe in compensation claims for toxic milk victims.

Possible Purchasers

Several companies are competing for the Sanlu Group, and the winner may be picked from Yili and Wahaha, said experts familiar with the matter.

The country's largest soft drink producer, Wahaha, announced its intention to purchase the troubled company last Saturday. Increasing demand for domestically produced milk was the major reason behind its move to purchase the company.

Wahaha head Zong Qinghou said the company wanted to build its own domestic supply chain for milk powder because imported milk powder used in Wahaha milk drinks was getting expensive.

However, it is not certain if Wahaha could play Sanlu's high quality assets well, for it has never been involved in powder production before, although Wahaha’s strength as a company is strong and comprehensive, said Wang.

Inner Mongolia Yili Industrial Group Co, China's largest dairy producer, had 2.6 billion yuan of cash and near-cash items in its accounts as of June 30, according to the company's financial report.

Compared with Wahaha, Yili has produced powder for year, and Wang believes Yili will be No 1 in the future milk powder market after successful merger and acquisition, although it has been involved in the tainted milk scandal as well.

"The milk market structure will have some change no matter who wins the bid at last," said Chen Yu, analyst from Beijing Orient Agribusiness Consultant Ltd.

Wahaha may launch a new milk powder brand if it wins the bid, said Chen, adding another potential bidder Wondersun will get back to the first tier of domestic brands if it wins.

"But, it is impossible for those firms to purchase Sanlu together," said Wang.