Josh Frydenberg misses China chance with Lion deal knockback

China’s Mengniu Dairy is the biggest producer of milk in its home market but won’t be allowed to buy Lion’s assets from Kirin in Australia. Picture: Bloomberg

Federal Treasurer Josh Frydenberg has missed the perfect opportunity to offer the Chinese an olive branch to ease trade tensions by deciding against the proposed $600m purchase of Lion Dairy by Mengniu.

The way FIRB works Frydenberg didn’t actually knock back the 25 per cent Chinese government-owned vehicle. He simply made it known he was planning to reject it on “food security” grounds.

Technically, no decision was made and instead it was Lion and Mengniu who pulled the bid but we all know the facts and that they were warned off.

It’s a nonsense process in the first place, because if the government knocks back a $600m deal it should at least publicly say so, with some real reasons.

Instead the parties involved read the tea leaves and canned the deal themselves.

Kirin-controlled Lion will now decide whether to see what progress can be made with two potential offers, or whether to hold on to the business for a while longer.

The potential offers are from the heavily indebted Bega Dairy and John Wylie’s Tanarra Capital.

The assets include Yoplait yoghurt, Big M flavoured milk, fresh milk for Coles and Woolworths’ house brands, as well as Pura branded milk, Berri fruit juices. The jewel in the crown is a distribution network of fridges in corner stores and petrol stations to rival that controlled by Coca Cola Amatil.

Lion also supplies a bunch of food service businesses and pubs, who, thanks to COVID-19 won’t be travelling too well in Victoria at least, and this may impact the sale price.

Yet while the commercial process works through, the big issue is basic lack of transparency.

The buyer, Mengniu, was last November cleared by FIRB to spend $1.5bn buying baby powder maker Bellamys. Four years ago it was cleared to spend $150m buying control of Gippsland dairy Burra Foods.

The seller was a Japanese company, Kirin, so it was a straight foreign to foreign deal and the ACCC cleared the transaction in February.

At an official, level the deal was cleared shortly after but then the politicians got involved and the deal ran into problems.

Relations between Australia and China are not flash, as evidenced tariffs imposed on barley, warnings against Chinese students travelling to Australia and last week’s threat to impose dumping duties on Australian wine.

Frydenberg told Mengniu he was “minded to reject the deal on food security grounds.’

This preliminary view is sometimes the trigger for the buyer to get some Australian involvement to ease the concerns. This didn’t happen, and with today being the drop dead date on the deal, Lion had the chance to decide whether to proceed.

Canberra encourages the parties involved to call it off themselves because this lets the Treasurer off the hook.

As noted earlier, a more open minded Treasurer might think where is the perfect chance to save $1bn a year in wine exports by offering an olive branch by clearing the deal.

No luck on that score and the “food security” excuse offered is a joke.

In New Zealand the government makes formal statements when knocking back such deals but in Canberra Frydenberg would prefer to say nothing.

He is in the process of reforming FIRB rules to effectively codifying existing practice in taking account of defence and security issues in considering foreign takeovers.

This offers the perfect chance to bring transparency to FIRB rules.

Some argue confidentiality works because publicity is the best way to kill foreign investment.

Perhaps. But in this case we have a buyer who was cleared twice before and a seller who is a foreigner.

If Frydenberg is going to change the rules on political grounds you might think he would have the courage to say so.