Mengniu gives China Inc dairy dominance

China Inc has bought itself a commanding position in Australia’s $13bn dairy industry.

China Inc has bought itself a commanding position in Australia’s $13bn dairy industry and a vastly strengthened platform of consumer brands and bulk milk supply to feed its global trade ambitions after China Mengniu Dairy agreed to buy Lion Dairy & Drinks for $600m.

The access to Australia’s milk supply and strong dairy brands is being touted by Mengniu as fitting in well with Chinese Premier Xi Jinping’s “One Belt, One Road” masterplan that aims to build new trade routes from China to the rest of the world.

“(Lion’s) portfolio of iconic household dairy brands with strong Australian heritage is highly attractive to consumers in the One Belt, OneRoad markets, and therefore provides significant market opportunities for the company to unlock,’’ Mengniu has told its shareholders, which include an arm of the Chinese government. A Hong Kong-listed company with deep links to the Chinese government, Mengniu will emerge as one of the biggest and most important customers for fresh milk and fruit juice from Australian farmers, taking 10 per cent of the national milk pool and 50 million kilograms of fresh fruit to go into drinking milk, yoghurt, flavoured milk and fruit juice.

The grab for Lion’s premium dairy business, which will need to be approved by the Foreign Investment Review Board and the Australian Competition & Consumer Commission, will hand Mengniu Dairy some of the biggest milk brands in the market, such as Pura and Dairy Farmers and popular flavoured milks Big M and Dare.

It transforms the dairy conglomerate into the buyer of about 10 per cent of Australia’s milk supply, mostly sourced from Victoria and NSW, and when added to its recent $1.5bn acquisition of infant milk formula producer Bellamy’s and dairy ingredients maker Burra Foods, creates a new force in regional dairy foods.

Mengniu is enmeshed in China Inc through its second biggest shareholder, the Chinese state-owned Cofco agricultural conglomerate, which has a stake of just under 20 per cent, and its move on Lion Dairy & Drinks adds to the swollen trophy case of Australian food brands and manufacturing sites now owned by Chinese companies.

The Bellamy’s deal launched by Mengniu in September marked the biggest Chinese takeover in the dairy sector since a Chinese firm bought Van Diemens Land dairy in 2016.

Lion’s dairy assets, which also include juice brands Daily Juice and Berri, delivers Mengniu a broad manufacturing base that feeds into one of the largest customer bases in Australia, which will prove handy as it stretches that supply chain back into China.

Mengniu will get access to a significant volume of the milk pool, 13 manufacturing facilities and the extensive cold chain distribution network that services 35,000 customers.

In documents lodged with the Hong Kong stock exchange, Mengniu informed its own shareholders about the importance of grabbing control of the Australian dairy assets and how it can use them to ratchet up its exporting profile in the Asia-Pacific.

“(Lion Dairy & Drinks’) access to the significant volume of highly regarded Australian milk pool, its large scale of 13 manufacturing facilities across Australia and the extensive cold chain distribution network that service 35,000 customers, all make (it) a strong comprehensive vertically integrated dairy player in Australia,’’ Mengniu said.

“Together with the infant milk formula products offered by Bellamy’s upon completion of its acquisition by the group, this extensive business layout would equip the group with a stronger foundation to excel in the Asia-Pacific markets.”

Asian and especially Chinese companies have been keen buyers of Australian food brands, which have a reputation for being “clean and green”. Mengniu also believes there are extra profits to be harvested from the UHT milk sector.

“By producing the group’s increasing ultra-heat treatment (UHT) milk products in (Lion’s) manufacturing facilities in Australia, the group could capture the profit margin previously reaped by third-party services providers,” it said.

“The acquisition further opens up potential raw milk and other ingredient sourcing opportunities which will bring about additional synergies within the group. From a supply chain perspective, the collaboration between (Lion), Burra Foods and Bellamy’s will potentially generate even greater synergies while providing better products to consumers across the Asia-Pacific region.”

Mengniu CEO Jeffrey Minfang Lu said the proposed acquisition would provide real opportunities for Australian dairy farmers, fruit growers and regional communities.

“This acquisition brings together the best of the East and West, harnessing Mengniu Dairy’s networks in existing markets and Dairy & Drinks leading brands and production capability,” Mr Lu said.

“Our proposed acquisition will bring tremendous opportunity for the entire Australian dairy sector, opening up a channel to our home market in a very significant way.”

For Lion it marks an exit from the dairy sector which has proved costly for the brewer and seen it lose billions of dollars in writedowns and impairments. Once completed, this sale, together with the sale of the specialty cheese business to Saputo Dairy Australia for $280m, will represent a full divestment of the Dairy & Drinks business.