Dairy Giant Feihe Guzzles Down One of Its Top Suppliers

China Feihe Ltd., one of China’s leading infant formula makers, will purchase one of its top suppliers, YuanShengTai Dairy Farm Ltd. for about HK$3 billion ($439 million), marking the latest consolidation in China’s diary industry.

Feihe will pay HK$0.63 for each YuanShengTai share, the pair announced late on Sunday, representing an 8.4% premium compared with the stock’s average price over the 10 trading days before the announcement. YuanShengTai’s stock fell 1.6% to HK$0.61 in Monday trade after the deal was announced, though at that level it is still up about 7% this month.

Feihe said it intends to keep YuanShengTai as a separate publicly traded company after the deal. Such an arrangement would require a float of at least 25% of YuanShengTai’s shares, according to Hong Kong Stock Exchange rules.

Feihe, which counts “Crouching Tiger, Hidden Dragon” star Zhang Ziyi as one of its current brand ambassadors, said the move is part of its broader plan to become an integrated company by taking ownership of one of its main suppliers. It first started buying milk from YuanShengTai in 2010 and the pair have since entered a long-term strategic cooperation agreement.

“Through the offers, the offeror group will be able to secure stable supply of high-quality fresh milk … to satisfy consumers’ growing demand for its infant milk formula products,” Feihe said. “Furthermore, the offeror group will be able to drive improved performance and strategic development of (YuanShengTai) in line with the offeror group’s future growth plans.”

With a market value of about HK$145 billion, Feihe is roughly comparable in size to China’s other top dairy company China Mengniu Dairy Co. Ltd. Feihe’s posted strong growth in the first half of the year, with revenue up 47.8% to 8.7 billion yuan, while its profit grew at an even faster 57.3% to 2.8 billion yuan. YuanShengTai lost money in 2018, but swung to a profit of 223 million yuan last year as dairy prices rose.

Feihe controlled about 14.5% of China’s infant formula market in the second quarter, up from 13.4% in the previous quarter, according to AC Nielsen. The broader industry has been slowly consolidating in recent years around companies like Feihe and Mengniu, which have bought up smaller operations including family-run farms.

Chinese dairies have also made some purchases abroad in a bid to boost their supplies of foreign milk, which is often more trusted by Chinese consumers after a major scandal more than a decade ago involving milk from domestic brands tainted with the industrial compound melamine. But Mengniu suffered a setback on that front last month, when it abandoned a plan to buy an Australian diary after failing to get government approval amid growing tensions between Beijing and Canberra.

Contact reporter Yang Ge (geyang@caixin.com)

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