Bottom line: A Shandong company’s purchase of nearly half of an Australian beef producer is the latest in a string of offshore meat acquisitions by Chinese firms, many of which could ultimately fail due to cultural differences.
Foreign meat companies have become the flavor of the day for acquisitive Chinese buyers, with word that a company called Delisi has just purchased 45 percent of Australian beef company Bindaree. The deal would come just weeks after leading Shanghai food group Bright Food paid a similar price for half of a New Zealand meat company, and a couple of years after the blockbuster purchase of leading US pork products maker Smithfield by WH Group (HKEx: 288).
Media are saying that a recent free trade agreement (FTA) between Australia and China may have helped to facilitate this latest deal between Delisi and Bindaree, and perhaps that’s partly true. But the reality is that China’s fast-growing economy is fueling a strong domestic appetite for meat. China’s own inefficient production also often means that locally produced meat is lower quality and more expensive than comparable products made overseas, which explains why these new offshore tie-ups are quite attractive.
According to the latest reports, Delisi, whose website also translates its own name as “Delicious”, will pay A$145 million, or about $100 million, for 45 percent of Bindaree, Australia’s fourth largest meat processor. (English article; Delisi announcement) The deal will help to make Bindaree’s beef products available to Delisi’s sales network that reaches more than half of China’s 1.3 billion people.
One report points out this new tie-up is well positioned to take advantage of the new Sino-Australian FTA, which will see Chinese import tariffs on Australian beef drop to zero in the next decade from the current rate of up to25 percent. But in the meantime, Delisi says the 2 sides plan to set up a major new meat processing facility in Qingdao, one of the largest cities in Delisi’s home province of Shandong in northeast China. That facility in a bonded tax zone will have capacity for 30,000 cattle, according to Delisi.
This particular deal looks quite similar to the one by Bright Foods, which earlier this month said it would pay around $200 million for half of New Zealand’s Silver Fern Farms. (previous post) The WH deal was easily the largest of the overseas meat purchases to date, and saw the company formerly known as Shuanghui pay $5 billion for Smithfield.
Appetite for Processed Foods
These meat deals are really just a sub-group of a larger recent flurry of offshore acquisitions by Chinese firms in a growing range of food product areas. Dairy companies are also popular, led by Bright’s $1.7 billion purchase of 78 percent of leading Israeli dairy Tnuva earlier this year. (previous post) Other popular areas include processed foods such as biscuits and breakfast cereals that could also appeal to Chinese tastes.
A noteworthy subtext to this M&A binge is that nearly all the buyers are big state-run firms, many of which are trying to be more entrepreneurial but which are also acting under Beijing directives to become more global. So far it appears that foreign management is being left intact in most of these purchases. That’s good in some ways, because these Chinese buyers have little or no experience running such offshore assets. But it also paves the way for future conflict, since work cultures are quite different at these big traditional western firms and their new Chinese owners.
We have yet to see how any of these deals will fare over the longer term, since most have just closed in the last 2 years. WH Group’s deal certainly hasn’t produced great results so far, with the company reporting its revenue and profit actually dipped by between 1-3 percent in the first 9 months of the year. Investors also haven’t been impressed, with WH Group’s Hong Kong-listed stock now trading 30 percent below its IPO price a year ago.
This kind of growing pain probably isn’t unusual for such big cross-border acquisitions, though it’s far from clear whether the situations will improve over the longer term. At the end of the day, I expect that half or more of these purchases could run into trouble and ultimately self-destruct due to cultural differences, creating headaches for both sides.
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