Mengniu Dairy to Acquire Bellamy’s for USD 1 billion

On September 16th, 2019, both Mengniu ^[1] and Bellamy’s ^[2] released notices to disclose Mengniu’s planned acquisition of Bellamy’s. As revealed by the announcements, Mengniu plans to buy Bellamy’s for A$ 1.46 billion (around USD 1 billion). The deal would need approval from Bellamy's shareholders, the NSW Supreme Court and Foreign Investment Review Board (FIRB). If everything goes well, the deal is expected to wrap up before the end of 2019.

Bellamy’s Deputy Chair, John Murphy, said, “Following careful consideration of the offer, the Bellamy’s Board has unanimously concluded that the deal is in the best interests of shareholders.” Mengniu also showed its excitement in the announcement. The group believes the Bellamy’s deal will lead to increased revenue and new market opportunities. However, the market seems less certain about this acquisition. On the same day, the stock price of Mengniu declined by 2.27%, while Bellamy’s increased by 50.41% ^[3].

To Mengniu: Market Expansion in Organic Infant Formula and Baby Complementary Food

Why would Mengniu choose Bellamy’s Organic? As we can see from its notice, Mengniu is expecting the organic infant formula market to be a major driver of growth going forward:

Extract from Mengniu’s Notice

Trends towards product premiumization are increasing the importance of organic products in the infant formula sector. In addition, the continued upward financial mobility of Chinese consumers in 3rd and 4th tier cities means new markets and greater demand for these premium products.
Compared to the overall infant formula sector, the organic infant formula segment has shown a comparatively faster growth rate. Consumers consider organic ingredients as better quality and safer products.

In its presentation ^[4], Mengniu also shared some market data and outlined that “Bellamy’s Organic” had already an excellent reputation in China and had already gained major traction amongst Chinese mothers. Bellamy’s is actually the 3rd most well-known organic infant formula brand in China.
(*Reading more market insights and regulation analysis related to organic infant formula and baby’s complementary food in Chemlinked: Organic Infant Formula in China: Market Access and Future Development ^[5] and Complementary Baby Food in China: Market Opportunities & Regulation Updates ^[6])

The group believes that Bellamy’s will offer new revenue streams and help Mengniu Group dominate the organic infant formula and baby food sector both in China and Southeast Asia, which aligns with Mengniu’s global strategy in developing high-end infant products and expanding into Australia, New Zealand and other Southeast Asian countries.

To Bellamy's: Chance to Pass the Recipe Registration?

The notice also outlines Mengniu’s plans to assist Bellamy in China. Will this help accelerate Bellamy’s registration? It’s hard to say. The official reason for the delay in recipe registration has been attributed to a backlog of onsite inspections and limited staffing for Chinese authorities. Based on this explanation nothing should change. However, Mengniu is China’s largest dairy enterprise and has huge sway over many factors.

On May 23, 2019, the National Development and Reform Commission of China (hereinafter NDRC) issued the 'The Promotion Action Plan of Domestic Infant Formula Milk Powder', which is designed to stimulate an increase in overall production volume of domestic infant formula. A domestic self-sufficiency level of more than 60% is the goal, with a concomitant increase in consumer satisfaction. NDRC is also encouraging domestic enterprises to acquire milk source bases or set up processing facilities overseas. (Read more at China's Domestic Infant Formula Enterprise Earmarked to Dominate Sector ^[7]) Thus, to some extent, the government may consider Bellamy’s registration in the context of the overall plan to prop up its domestic sector which could translate to an accelerated approval for Bellamy’s.

Experts' Opinion

Song Liang, a senior dairy industry expert, said, that in addition to expanding its organic infant formula portfolio, this deal will also boost Mengniu’s overseas layout and industry chain in Australia. Moreover, this deal can make up for the loss of Junlebao as well. In July 1st, 2019, Mengniu announced the sale of all its shares of Junlebao ^[8] for around 4 billion RMB (USD 0.6 billion). According to Mengniu’s notice, the net asset of Bellamy's totaled to A$ 232.3 million (around USD 159 million) in 2019. In terms of Bellamy’s recipe registration, Song Liang believes Mengniu’s Australian factory BURRA may be another choice for Bellamy's.