AFR
Bellamy's steps up overtures to daigou tradersSimonEvans and JohnKehoe
Sep 17, 2019 — 12.26pm
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Bellamy's Australia has hired Grant Samuel tocompile an independent expert report on a $1.5 billion takeover offer by $25billion giant China Mengniu Dairy Company, as the group steps up a push to liftsales made through daigou traders to offset a profit slide from regulatorydelays.
Political tension over the takeover offer for theinfant formula group escalated on Tuesday as crossbench senators accused Chinaof "market manipulation" by delaying approving a licence forBellamy's to sell Chinese-labelled organic baby formula in Chinese retailoutlets, and driving down its share price.
Bellamy's shares gained a further 1.1 per cent onTuesday to close at $13.03, following a 55 per cent jump on Monday after thetakeover proposal was announced. Before Monday's offer Bellamy’s share pricehad tumbled 62 per cent over 18 months, largely due to the regulatory hold upin China.
"Will the Foreign Investment Review Board andthe Treasurer investigate the role of the Chinese government in manipulatingmarket access to support Chinese company buyouts?" Centre Alliance SenatorRex Patrick said.
Greens Senator Peter Whish-Wilson wrote toTreasurer Josh Frydenberg asking the FIRB to probe whether the Chinesegovernment had depressed Bellamy's share price ahead of an opportunistictakeover offer – contrary to Australia's national interest test and theChina-Australia Free Trade Agreement.
Bellamy's Australia CEO Andrew Cohen says thedaigou trade is crucial to the company and it has stepped up trade marketing tothem. David Rowe
Finance Minister Mathias Cormann said thegovernment didn't comment on FIRB matters.
Bellamy's chief executive Andrew Cohen said thecompany is trying to strengthen relationships with daigou traders who buy thegroup's infant formula in Australia, and sell it online in China. About 50 percent of Bellamy's sales are made through e-commerce channels in China eventhough there has been a lengthy regulatory delay in gaining SAMR approval (State Administration for MarketRegulation) from Chinese authorities for Chinese-labelled organic infant formula produced from the group's Camperdown factory in Melbourne.
Mr Cohen said the daigou traders are crucial toBellamy's and the group is going out of its way to ensure that profits andmargins for them are sustainable, with a marketing drive in full swing to thedaigou segment.
"We do a lot of trade marketing,'' Mr Cohensaid.
"Australia and the daigou channel remains thecore of our business,'' he said.
Bellamy's, which on Monday announced that its boardwas backing a $13.25 per share offer, has appointed Grant Samuel as anindependent expert to compile an outside opinion on whether the offer is fairand reasonable, ahead of a shareholder vote likely to be held in earlyDecember.
Vitamin group Blackmores suffered a large profit drop after hundreds of smaller daigou traders exited from the trade when regulations in China were tightened up, making it too difficult for many smaller part-timers. It estimated last month that about 40 per cent of daigou traders who had fuelled a golden period of surging profits at Blackmores in 2015 and 2016 had disappeared.
Mr Cohen said while there had been some minorimpact on Bellamy's from the changes in the daigou market, it had only beensmall. "There has been some shift. It's not a big shift for us.''
The SAMR delay caused a profit slowdown atBellamy's this year.
Bellamy's has also doubled its marketing spend inthe June half, using ambassadors including Singaporean-Chinese singer StefanieSun, who the company says has 24 million Weibo followers and is an"A-grade celebrity singer".
Citi analyst Sam Teeger said while FIRB approval''remains a key risk'' to the transaction, Bellamy's ''arguably holds nostrategic primary-producing assets that could potentially act as a roadblock''.
China Mengniu already owns a 79 per cent stake inVictorian dairy group Burra Foods after a buyout in late 2016 which valued that business at around $300 million.
Burra Foods, based in Victoria's Gippsland region,is a supplier of fresh milk, cheese and milk powder. Bellamy's, which listed onthe ASX in 2014, has two main suppliers of milk powder under contractualarrangements, Bega Cheese Ltd and New Zealand giant Fonterra. Those contractshave ''shortfall'' clauses where Bellamy's has to pay extra to those suppliersif production volumes don't reach certain levels.
Limiting appeal
Ord Minnett on Tuesday said it didn't expect arival bid to be made for Bellamy's. This was because of the hefty 59 per centpremium to the pre-bid share price and the ''absence of China regulatoryapproval, which was a factor limiting appeal as a listed equity investment andarguably as an acquisition target''.The stockbroking house put a target price onBellamy's of $13.25, which is equal to the bid price of $12.65 per share plusthe special dividend of 60¢ which is part of the offer.
Ord Minnett said approval from the ForeignInvestment Review Board was ''likely to be received'', although there werestill question marks over that.
Morgans analyst Belinda Moore said in a note thatthe multiple offered by China Mengniu was ''well in excess of industry takeovermultiples'' and the timing of the offer was ''somewhat opportunistic'' becauseBellamy's earnings are depressed because of the delay in receiving SAMRapproval.
China Mengniu, which is listed on the Hong Kong disallowed, outlined in its own presentations to investors that premium andsuper-premium infant formula brands in China were growing the fastest and itaimed to ''aggressively expand'' Bellamy's Organic's presence in China if itsoffer is successful.
It indicated that Bellamy's was No.3 in brandawareness in the organic formula segment with consumers in China.
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SimonEvans writes on business specialisingin retail, manufacturing, beverages, mining and M&A. He is based inAdelaide. Connect with Simon on Twitter. Email Simon at simon.evans@copyright link
JohnKehoe writes on economics, politicsand business from the Canberra press gallery. He is a former Washingtoncorrespondent. Connect with John on Twitter. Email John at jkehoe@copyright link
