NEW YORK (Reuters Breakingviews) - Inner Mongolia Yili Industrial, China’s largest dairy company, is preparing a gut-busting $850 million bid for Danone’s Stonyfield yogurt business. The French food group will need to marshal all the willpower it can to resist the temptation of this rich offer. Far too many Chinese buyers of U.S. assets have left sellers in the lurch. Yili itself was thwarted by regulators on a recent deal at home. Danone has bigger interests to consider here than cash.
Though U.S.-based Dean Foods may also be in the mix, Yili looks like a keen contender. It is the leader in the world’s largest milk market, logging around $8.7 billion in revenue in 2016. The mooted price Yili is considering would come to some 17 times Stonyfield’s $50 million in earnings before interest, tax, depreciation and amortization in 2016. That’s about $150 million more than analysts expected the business to fetch a few months ago.
The premium reflects Yili’s need to acquire reputable brands. The Shanghai-listed enterprise is one of a cabal of dairies exposed for putting melamine in milk in 2008. In 2012, the $15.5 billion market-cap company recalled baby formula tainted with mercury. Bringing foreign organic products to China’s finicky market could theoretically help refurbish Yili’s domestic image – similar to what China Bright Food attempted with Weetabix cereal.
But the Bright Food experiment did not pay off; it sold Weetabix to Post Holdings in April. That failure could weigh on the minds of Beijing bureaucrats assessing Yili’s business plan, especially after monopoly regulators killed off Yili’s attempt to purchase Hong Kong-listed China Shengmu Organic Milk. If Yili spoils a purchase of Stonyfield, it would embarrass China’s dairy industry even further - and beyond the People’s Republic’s borders.
For Danone, the big risk is that Yili may fail to make good on its promises. Mainland regulators have actively curtailed expensive foreign shopping trips by Chinese companies. A few have flaked out in the United States mid-transaction, such as Anbang Insurance’s pursuit of Starwood Hotels, and Zoomlion’s for Terex.
Danone will need to evaluate this suitor with extra care. The $49 billion company led by Emmanuel Faber is required to sell Stonyfield as a condition for approval of its $10 billion purchase of WhiteWave Foods. There’s no reason to put at risk for a few more dollars from China, especially if those dollars don’t actually show up.
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