17 July 2018

Yashili shows it pays sometimes not to jump at a buyout offer

Yashili International (01230.HK) saw more than 10 percent of its minority shareholders reject a buyout offer from China Mengniu Diary (02319.HK) earlier this year after the latter launched a mandatory offer following a deal to buy 75 percent stake in Yashili from controlling shareholders — Chairman Zhang Lidian and his family – and the Carlyle Group.

The HK$3.5 buyout offer at that time was made when Yashili shares were trading at an all time-high. However, as things turned out, it is the investors who had resisted the temptation to cash out that are now the real winners.

The fact that Mengniu was prepared to pay up to HK$12.5 billion (US$1.6 billion) for Yashili — the largest single M&A deal in the domestic dairy industry, was plain evidence that Mengniu had great confidence in the potential of Yashili. And those who declined to accept the offer saw this point clearly.

Since the 90 percent threshold to take Yashili private was not met, Yashili retained its listing status. Mengniu then pared its stake down to 76.58 percent in a recent placement as it sought to meet the Hong Kong bourse’s public float requirements.

The entities who took up the placement shares were Singapore state investment firm Temasek, China-focused private-equity firm Hopu and other funds. With these iconic investors getting their hands on Yashili, the stock took off and has never looked back.

The placement took place on Nov 11. at HK$3.5 a share. Yashili is now quoting at HK$4.88, an almost 40 percent jump in a matter of days.

The supply-demand situation may stay favorable for the counter in the medium term.

After completion of the deal, Mengniu holds 76.58 percent of Yashili while Temasek and four other institutional investors have a total of 13.2 percent. Thus, only 10 percent equity is available for trade in the market. Given the scarcity factor, the share price could spike easily if any positive news emerges.

And Yashili attracts big names for a reason. Raw milk supply crunch problem has not been resolved in mainland China, and large milk producers like Inner Mongolia Yili Industrial Group (600887.CN) and Bright Dairy & Food (600597.CN) are sourcing raw milk supply internationally since last year.

Yashili is already a step ahead. In Januray, the group announced a 1.1 billion yuan plan to set up a factory in New Zealand to produce base milk powder and finished goods. At the same time, the group will continue to import raw milk powder from New Zealand.

Milk sourcing has become the differentiating key since the tainted milk scandal in China five years ago. Yashili now ranks No. 5 among domestic infant formula producers in terms of production volume, with the 2012 output at 25,800 tons, more than five times that of Mengniu, according to a report from Shenyin Wanguo Securities.

– Contact the writer at [email protected]



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