Bright’s Tnuva Buy: Trouble Ahead?

Bright in deal to buy Tnuva stake

More than 8 months after word of a potential tie-up first emerged, China’s Bright Food and leading Israeli dairy Tnuva have finally reached a deal that would see the former buy control of the latter. It’s not too surprising a deal of this magnitude took so long to conclude, and strategically such a move should be a positive development for Bright as it seeks to improve its internal management and global reach. But that said, I honestly can’t see this deal getting approved by security-obsessed Israel in its current form, which would put control of one of the country’s biggest food companies into Chinese hands.

I’ll come back to the security issue shortly, as I do think that could become a major obstacle but not necessarily a deal-killer. But first let’s take a closer look at the deal, which will reportedly see Bright buy 56 percent of Tnuva from private equity firm Apax. (English article; Chinese article) A source said the deal will value Tnuva at about $2.5 billion, meaning Bright would be paying about $1.4 billion for its stake.

Talks for this particular deal were first reported last September, and the latest news indicates the new agreement is still preliminary. Tnuva is one of Israel’s leading food companies, with 2013 revenue of about $2 billion. The deal would be similar in size to a 2012 deal that saw Bright pay about $1 billion for 60 percent of leading British breakfast cereal maker Weetabix.

Bright has also made a number of other major global acquisitions over the last 2 years, with an aim to not only extend its global reach but also to bring overseas food management skills back to China. In most of the cases, the company has taken a relatively hands-off approach and allowed domestic management teams to remain in place at its acquisitions. That kind of tack is both practical and politically savvy, since it will ease local concerns about foreign takeovers of major assets in the sensitive food sector.

That brings us back to the subject of regulatory approval for the Tnuva deal, which could face a bumpy road ahead. Bright’s latest purchase plan has already been criticized by some Israeli lawmakers, who say it would be foolish to let such a major food maker come under Chinese control and would prefer to see Tnuva become publicly listed on the nation’s main stock exchange.

China food deal watchers will recall that another major purchase got similar scrutiny last year, when Chinese meat processor Shuanghui agreed to buy leading US pork producer Smithfield. That deal also got criticized by some US lawmakers, and came under congressional scrutiny before ultimately getting approved. Since then, Shuanghui has changed its name to WH Group, and tried unsuccessfully to list the entire company in Hong Kong. (previous post)

So, what does the Smithfield experience tell us about this latest deal and its chances for approval? Some might say regulatory approval of the Smithfield sale demonstrated US commitment to fair trade, and also acknowledgement that Smithfield was struggling and needed a wealthy buyer to turn around the company. Tnuva looks similar in some ways, since the company was also probably underperforming when its current private equity owners took control in 2008.

But anyone who thinks the US is hypersensitive about national security should look at Israel, which is obsessed with the issue due to its stormy past that includes numerous wars with most of its neighbors. While China obviously isn’t one of Israel’s enemies, I honestly can’t see the country’s leaders letting such an important food producer come under Chinese control. That said, I do think Israel would be willing to let Bright purchase a smaller, non-controlling stake in Tnuva, and we could ultimately see a deal approved with that kind of revisions.

Bottom line: Bright Food is likely to ultimately acquire a stake in Israeli dairy firm Tnuva, but it may have to settle for a non-controlling stake in order to get regulatory approval.

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