M&A

Milking it

Bright Food wants to buy an Israeli food giant

To match Special Report ISRAEL-CONCENTRATION/

Cottage cheese controversy

The first kibbutz opened in Degania in 1909. The farms started out as utopian communities, with a heavy tinge of socialist values. So it is perhaps appropriate that a state-owned firm from Communist China now wants to get its hands on their produce.

A Chinese buyer is looking to gain a majority stake in Tnuva, Israel’s largest food group. The cooperative sources much of its foods from kibbutz, which make up a significant proportion of its 620 members. Founded in 1926, Tnuva has gained a dominant position in Israel’s dairy industry controlling about 70% of the market. It owns seven of the 10 best known food brands in the country and its products occupy 14% of shelf-space in the country’s supermarkets.

In 2007, British private equity firm Apax Partners bought 56% of Tnuva, in a deal that valued it at $1.03 billion. According to the Jerusalem Post, Bright Food Group – a state-owned entity controlled by the Shanghai municipal government – has now agreed to purchase the Apax stake for $1 billion (giving Tnuva an enterprise value of $2.5 billion). The kibbutz movement will retain 23% of the company.

The deal is part of Bright’s plan to expand its international footprint. It has already made a series of high profile purchases, such as the $1.9 billion acquisition of the Weetabix cereal brand in the UK (see WiC149), as well as inking deals with Manassen Foods in Australia and Synlait Milk in New Zealand.

Bright’s management has set a goal of growing overseas sales to 25% of its total revenues by the end of next year (they currently stand at 15%).

Bright says it will retain the bulk of Tnuva’s existing management team, but will assign its own representative as the new chairman.

Despite the assurances from both the buyer and the seller that the deal will proceed smoothly, Chinese media is not so sure. National Business Daily reports that it requires regulatory approval from Tel Aviv, which could prove sensitive given Tnuva’s imposing market share.

Israeli consumers may also be unenthused at the prospect of most of the country’s dairy industry being ceded to a Chinese firm. As WiC has reported on a host of earlier occasions, China’s own dairy production has been plagued with scandals since 2008 – when melamine was first found in local milk powder.

Of course, one advantage of the purchase might be for Bright to learn from Tnuva’s supply chain and quality control techniques. It might also seek to sell Tnuva’s branded products, such as yogurts, back into China where consumers favour ‘safer’ foreign dairy products.

Then again, Bright executives are buying a firm that has battled its own set of controversies too, especially a public backlash when Tnuva raised prices for some of its staple items. Back in 2011 one angry consumer started a protest group on Facebook that soon surpassed 100,000 supporters and led to a boycott of Tnuva’s cottage cheese. A class action lawsuit was launched, alleging that Tnuva had “abused its position” to raise cottage cheese prices by more than 40% in the previous five years. An Israeli antitrust investigation followed into whether Tnuva (the company’s name means ‘fruit’ or ‘produce’ in Hebrew) had taken advantage of its monopoly power to hike prices.

Israeli financial newspaper Globes then ran a series of articles that traced the price increases to Apax’s demand for improved profits. Politicians soon got involved and the government lowered duties on imports to create more competition. After an investigation found that Tnuva’s prices were “excessive and unreasonable” the government imposed price controls last year, forcing down the price of two of Tnuva’s products by 20%.

Given Tnuva’s PR pounding, its new Chinese controller will have to tread carefully (assuming the deal goes through). A little over half of the company’s dairy products are now subject to price supervision too, limiting potential gains from margin improvements. That suggests that if its goal isn’t to sell a lot more of Tnuva’s produce to Chinese consumers, Bright’s latest acquisition may not deliver the most exciting returns.


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