(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)
By Wei Gu
HONG KONG, Oct 25 (Reuters Breakingviews) - Pfizer’s (PFE.N) powdered milk business could fuel a new wave of China-led foreign acquisitions. Mengniu Diary (2319.HK) is weighing up a possible $10 billion bid for U.S. pharma giant’s nutrition division. Unlike past deals in consumer goods, which focused on China’s low labour costs, this looks more linked to the country’s rising consumer demand. Buying foreign brands may also help China shake off worries about its food safety, if bidders tread carefully.
The Pfizer unit could become China’s second-largest foreign acquisition ever, after Chinalco’s $14 billion investment in Rio Tinto. It would also mark a strategic U-turn for Chinese bidders. They have bought foreign brands and distribution networks mainly to generate cost savings using low-cost Chinese labour, and boost exports. But as China gets richer and labour more expensive, the challenge is to supply high-quality brands that satisfy domestic demand.
Foreign manufacturers bring technology, and sometimes an existing foothold in China. Mengniu, while a giant in liquid milk and ice cream with valuable access to retailers and cow farms, has barely any presence in baby formulas. Pfizer has 5 percent share of that market in China, according to China Investment Consulting. It’s a big market too, thanks to China’s 17 million newborns a year.
Global brands also bring confidence. Pfizer and other foreign brands stole a march on the sector after a national tainted milk scandal in 2008 that led to several infant deaths. It started building the world’s largest formula factory in Suzhou, a city close to Shanghai. Meanwhile, brands like Mengniu have struggled to regain confidence. China’s formula imports more than doubled in 2009, and rose by another 55 percent in 2010, official data shows.
Even if Mengniu does launch a bid, there are plenty of risks. Retaining the Pfizer unit’s reputation is the main one. Without careful handling, customers may start to worry about standards being compromised. There’s also the financial question of how Mengniu will bid for a company almost twice its own market capitalisation. But if these can be resolved, a deal could be just the thing to nourish other Chinese consumer companies’ M&A aspirations.
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-- China Mengniu Dairy Co Ltd, the country's biggest dairy company, is considering a bid for the nutrition business of Pfizer, the U.S. pharmaceutical company, the Financial Times reported on Oct. 24. Mengniu, backed by state giant COFCO Corp and previously involved in a tainted milk scandal that hit China's dairy industry in 2008, said on Oct. 25 that it was not in direct talks, but would closely monitor developments.
-- Inner Mongolia-headquartered Mengniu, the country's top dairy products maker by sales and value, said earlier in 2011 it was looking to expand into overseas markets and to become a global top-10 dairy company. It was ranked 16th by sales by Rabobank in 2010.
-- Reuters: Mengniu says not in talks with Pfizer on nutrition business [ID:nL3E7LO0DF]
Fat chance [ID:nLDE7270NK]
-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [GU/]
(Editing by John Foley and David Evans)
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