M&A

Going sour

Fonterra troubled by another Chinese partner

Beingmate-milk-w

Not a formula for success

There were mixed reactions when the world’s biggest milk supplier Fonterra announced in late 2014 its second dealmaking foray in China by investing $445 million in Hangzhou-based Beingmate.

The optimists called the deal a “game-changer” for giving the Auckland-based firm an 18.8% stake in what was then China’s most promising local infant formula producer. Yet some had doubts, recalling Fonterra’s association with a company at the heart of China’s tainted milk scandal in 2008 (see WiC6 for our first mention of it).

Sanlu Group, a local partner at the time and in which Fonterra had a 43% stake, was found guilty of producing infant powder that contained a high dose of melamine normally used for making plastics. As a result of Sanlu’s subsequent bankruptcy, Fonterra wrote off $200 million.

Luck does not seem to favour Fonterra in China. Four years on, its tango with Beingmate has turned out to be another fiasco. On March 30 the Kiwi company reported an after-tax loss of NZ$348 million ($254 million) for the six months ended in January. The biggest drag came from its NZ$405 million impairment charges from Beingmate.

“Beingmate’s continued underperformance is unacceptable,” Fonterra chairman John Wilson said in a statement, adding that the turnaround of the investment is now a key priority for the company’s senior management.

In the red for two consecutive years, Shenzhen-listed Beingmate saw its net loss widen by 23% to Rmb964 million ($152.8 million) in 2017. This is despite the Rmb123 million it made selling 29 properties and some upstream assets in the second half of last year, according to Sohu.

Beingmate blamed its financial woes on a new rule this year which requires all infant formula makers to register their products with the authorities and pass safety inspections. Additionally each plant is restricted to working with just three brands, and each brand can only make three different products.

The result: since January about 60% of supply has been removed from the market through this registration mechanism, leaving 940 brands on the shelves.

“The market had yet to consolidate as much as we believed, but a lot of brands had been trying to liquidate their merchandise through aggressive price drops,” Beingmate said in a filing to the Shenzhen bourse. “Our sales revenue was below expectation.”

Yema Caijing, a local news portal, suggested that Beingmate’s problems are rooted in its inability to adjust its distribution model. It relied on a dealership model at supermarkets and maternity stores and has largely missed out on consumers that shifted their shopping online.

“That market changed so quickly away from sales in normal retail. The kind of stores that were full of people three years ago now are empty,” Fonterra’s chief executive Theo Spierings told the New Zealand Herald. Spierings said that he saw the necessity to revise Beingmate’s sales strategy but was powerless to enforce any changes due to being outnumbered on the Chinese firm’s board (it has two of nine seats).

Beingmate’s founder Sam Xie left the company in 2011 but rejoined as its ‘lead scientist’ in 2015 and retained a 24% stake. He took the helm of Beingmate last month as CEO again – but against a backdrop of dismal numbers, including a sharp decline in market share to just 2.5%, down from 9% in 2013.

Meanwhile, Spierings, New Zealand’s highest paid executive in 2016, will step down by the end of this year amid growing criticism of Fonterra’s missteps. Some frustrated farmers, also shareholders of the cooperative, had threatened to stop supplying milk due to worries of further write-offs on Beingmate.

“For them, Beingmate is the prime example of a large investment made in haste with inadequate due diligence, made worse by a subsequent lack of monitoring and corrective action,” wrote the New Zealand Herald, referencing a number of shareholders.

It doesn’t help that Beingmate also forecasts a rather bleak future for itself. The new regulations have seen 68% of its products (by value) fail to get approvals from the government. Any clarity on future profits looks unlikely – particularly as investors are mindful that Beingmate has revised its financials nine times in the last five years.


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