Fonterra Deepens Chinese Links With Baby Formula Partnership

Fonterra Cooperative Group Ltd. (FCG), the world’s biggest dairy exporter, said it will pay NZ$615 million ($515 million) for a stake in a Chinese infant formula maker as it seeks to tap the nation’s lucrative baby milk market.

The New Zealand company will buy a stake of as much as 20 percent in Beingmate Baby & Child Food Co Ltd. (002570), a subsidiary of China’s fourth-largest infant formula maker, it said today. The companies also plan to set up a joint venture to buy Fonterra’s Darnum plant in Australia and a distribution agreement to sell Anmum, Fonterra’s own baby milk brand, in China.

The deal will allow Fonterra to use Beingmate’s distribution network for its products, helping the New Zealand company increase the number of sales points in China much faster than if it expanded on its own, said Torsten Stocker, a Hong Kong-based partner at consulting firm AT Kearney Inc. Fonterra is seeking to boost its business in a country where the baby formula market is forecast to more than double from last year to 191 billion yuan ($31 billion) by 2017.

“There is still a large number of infants being born and there is still a lot of underlying growth,” Stocker said. “Breastfeeding rates are lower than in other markets, and parents will always buy the best for their babies.”

Photographer: Brendon O'Hagan/Bloomberg

Theo Spierings, Chief Executive Officer of Fonterra Cooperative Group Ltd. Close

Theo Spierings, Chief Executive Officer of Fonterra Cooperative Group Ltd.

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Photographer: Brendon O'Hagan/Bloomberg

Theo Spierings, Chief Executive Officer of Fonterra Cooperative Group Ltd.

The tie-up will also help Beingmate guarantee a supply of quality raw materials, which is difficult to find in the country, Stocker said.

The tie-up with Beingmate is “a game-changer that will provide a direct line into the infant formula market in China, which is the biggest growth story in pediatric nutrition in the world,” Fonterra’s Chief Executive Officer Theo Spierings said.

Food Scares

The alliance comes a year after a whey protein scare prompted product recalls across Asia by baby formula makers such as Danone and Abbott Laboratories (ABT) and also caused a temporary halt on imports to China. The New Zealand dairy company said its baby formula may have been tainted with a potentially fatal botulism-causing bacteria. The incident was later proved to be a false alarm.

The Chinese infant-formula market is worth NZ$18 billion and will grow to NZ$33 billion by 2017, Auckland-based Fonterra said. The dairy firm already sells Anmum supplements for pregnant women in the Asian nation and started sales of its Anmum-brand infant formula in the southern Chinese city of Guangzhou last year.

Expanding in China

Fonterra said it will start the process of issuing a partial tender offer to gain as much as a 20 percent stake in Shenzhen-listed Beingmate Baby at 18 yuan a share, 25 percent more than the last closing price of 14.36 yuan in June, when the stock was halted. Fonterra will also spend NZ$555 million to increase milk processing capacity in New Zealand, it said in a separate statement today.

Shares (FSF) in the Fonterra Shareholders’ Fund, a publicly traded trust that tracks the cooperative’s dividend payout and earnings, rose 0.2 percent to close at NZ$6.13.

Hangzhou Beingmate Group, the parent of Beingmate Baby, is China’s fourth-largest infant formula maker with 9.9 percent of the market last year, according to industry researcher Euromonitor International. China’s baby milk market is dominated by foreign companies, with Mead Johnson Nutrition Co. (MJN) being the largest, followed by Nestle SA (NESN) and Danone, Euromonitor data show.

Tainted Milk

Foreign infant formula makers gained market share in China as consumers lost confidence in local brands after domestic baby milk powder tainted with the chemical melamine killed six babies in the country in 2008.

Murray Goulburn Cooperative Co., Australia’s biggest milk processor, is also seeking to meet growing Chinese demand for formula, Managing Director Gary Helou said today in a phone interview. The producer is investing A$127 million ($118 million) to expand production of infant nutrition, consumer cheese and dairy beverages to raise exports to China and the Middle East, he said.

Fonterra is forging alliances and developing farms in China to tap demand for milk in the world’s second-biggest economy. China is the largest customer for New Zealand dairy products, which account for almost a third of the nation’s exports.

“By working together with Beingmate, we will strengthen our infant formula brand presence in China and link China to high quality ingredients from New Zealand,” Spierings said. “We will also work with Beingmate to evaluate mutual investments in dairy farms in China.”

Price Fixing

The New Zealand farming co-operative, which makes products such as Anchor butter and Anlene milk, has faced some roadblocks in China. Chinese authorities fined Fonterra, along with other overseas companies, about 4.5 million yuan in August 2013 for fixing product prices.

The company cut prices for its Anmum supplements for pregnant women by 9 percent last year after the National Development and Reform Commission, China’s top economic planning agency, began an investigation that month into the pricing of their products.

To contact the reporters on this story: Liza Lin in Shanghai at llin15@bloomberg.net; Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Terje Langeland

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