China Mengniu Dairy Company’s Bellamy’s bid is sweet enough, say analysts

The $1.5 billion offer for Bellamy’s is generous enough to put rival bidders off, analysts say.

Betty Tsai with some Bellamy's baby formula. Picture: John Feder.

The $1.5 billion cash offer price for Bellamy’s is generous enough to put rival bidders off, analysts say.

China Mengniu Dairy Company’s offer for the infant formula maker outstrips takeover multiples on other deals in the sector, according to Ord Minnett analysts.

Bellamy’s, which is waiting on backing from China’s State Administration for Market Regulations to sell its products through China’s mother and baby store channel, told the market on Monday that it had entered into a scheme of arrangement with Hong Kong-listed China Mengniu Dairy Company, which currently holds a 2.9 per cent stake in Bellamy’s.

The announcement triggered a 54.9 per cent surge in Bellamy’s share price, with the shares lifting on hopes that Mengniu would help to fast track the company’s strategy, given its strong distribution network and substantial financial backing.

Ord Minnett analysts said in a note to clients on Tuesday that no competing bid was expected, given the premium offered. Rival bidders would also be put off by the lack of Chinese regulatory approval, the said.

The Chinese bid for Bellamy’s represented “a positive for other Australia and New Zealand listed companies exposed to the China consumer, due to potential corporate appeal,” Ord Minnett said.

However, “we suggest Bellamy’s could be a better competitor in the China infant formula market with China Mengniu,” they said.

Bellamy’s shares initially dropped on Tuesday following Monday’s rally, but by midday the share price had recovered early losses to be trading up 0.1 per cent at $12.90 each.

Morgans analysts estimated that the cash office price of $13.25 per share, consisting of $12.65 cash from Mengniu and fully franked special dividend of 60 cents, represented a fiscal year 2020 earnings before interest, tax, depreciation and amortisation multiple of 26.4 times, well in excess of other takeovers in the industry.

The analysts pointed out that Chicago-headquartered Mead Johnson Nutrition Company was acquired by Reckitt Benckiser Group at just 17.4 times earnings.

“The timing of the offer is somewhat opportunistic, given Bellamy’s earnings are depressed, given the delay in receiving SAMR approval,” the Morgans analysts said.

Still, they said the offer was an attractive one for shareholders, given the subdued trading conditions the company was currently facing, and the fact that SAMR approval remained uncertain.

A turnaround in Bellamy’s earnings would have taken time, given the increased competition, combined with a lower birthrate in China, as well as regulatory changes which have affected smaller “daigou” buyers, Morgans said.

Analysts at both Morgans and Ord Minnett maintained their hold ratings on the stock but increased target prices.

“The key risks to our view are not receiving the necessary regulatory and shareholder approvals,” the Morgans analysts said.

The takeover offer for Bellamy’s is subject to a number of conditions including court and shareholder approval, as well as a green light by the Foreign Investment Review Board.

“FIRB approval is a question, but in our view it is likely to be received,” Ord Minnett analysts said.

“Bellamy’s owns no agriculture and the value of its manufacturing facilities lie in the China customs approvals, while the majority of its product is consumed in China.”