Moving on from milk scandal, Fonterra ties up with China's Beingmate

WELLINGTON Wed Aug 27, 2014 3:35am EDT

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WELLINGTON (Reuters) - New Zealand's Fonterra on Wednesday said it will take a stake in Chinese baby food and formula maker Beingmate Baby and Child Food Co. Ltd in the dairy giant's first tie-up with a Chinese processor since its involvement in a tainted infant formula scandal in 2008.

The tie-up continues a trend of foreign dairy producers partnering with established Chinese players to grab greater shares in China's fast-growing dairy market. French dairy giant Danone SA (DANO.PA) in February paid $665 million to lift its stake in China Mengniu Dairy Co Ltd (2319.HK).

Fonterra Cooperative Group Ltd (FSF.NZ), the world's largest dairy exporter, said it would take a stake of up to 20 percent in Beingmate 002570.SZ, China's biggest maker of infant milk formula, at 18 yuan per share. That is a 25 percent premium to the stock's last closing price.

Its total investment in the partnership came to about $514 million, including proceeds from selling Beingmate a stake in an Australian plant, Fonterra said.

The cooperative also said it would invest about $463 million to boost dairy processing capacity in New Zealand.

Chief executive officer Theo Spierings said Fonterra was moving on from a 2008 scandal when Sanlu, its then-partner in China, was found to have added a toxic industrial chemical called melamine to bulk up infant formulas. Six children died and thousands fell ill due to the contamination.

"China is a completely different environment now, Beingmate is a completely different partner ... and we are also completely different from where we were five, six years ago," he told reporters.

Burned by the Sanlu disaster, the New Zealand dairy giant has been accused by some analysts of being slow to enter China's branded infant formula market, which research firm Euromonitor says could double to $31 billion by 2017.

HITTING THE SHELVES

Fonterra supplies wholesale infant milk formula to Chinese companies, which sell it under their own brands, but until recently it hadn't marketed its own Anmum infant formula to consumers in the world's second-biggest economy. Under the deal, Fonterra will gain access Beingmate's vast distribution channel for Anmum.

Spierings said Beingmate's role as China's biggest domestic supplier of milk formula and its clean track record made it an attractive partner. Beingmate's brands, which include Love+ and Champion, have about 10 percent of the market.

"Beingmate have pretty good distribution and are definitely known in the market, so this is probably going to help Fonterra," said Ben Cavender, a Shanghai-based principal at China Market Research Group.

"It could be a big money maker for them but they are also coming into a very competitive market now with consumers that are much more savvy than they were three, four years ago."

ANZ rural economist Con Williams said Fonterra was cautious about China, after the company was heavily criticized for failing to blow the whistle on Sanlu sooner and more loudly.

"It got burned with Sanlu so it wasn't in a hurry of getting back into China," he said.

"There are (product quality) challenges, but they must be pretty confident that they can navigate those."

China has been dogged by food safety issues with foreign firms coming come under strong scrutiny.

A year ago Fonterra said it had found a potentially fatal bacteria in one of its products, triggering recalls of infant milk formula in markets including China. Tests later found the initial finding was incorrect. [ID:nL4N0GT0UZ]

Danone lost customers last year in claims of high prices, bribery and the Fonterra food safety scares. Last week, U.S. foodmaker H.J. Heinz Co was forced to recall some of its infant food products because they were found to contain excess levels of lead. [ID:nL4N0QP1E3]

China is a crucial market for Fonterra, as the world's No. 2 economy imports about one quarter of New Zealand's total dairy exports to feed growing demand for milk products, particularly milk formula, from the country's booming middle class.

(1 US dollar = 6.1475 Chinese yuan)

(1 US dollar = 1.1966 New Zealand dollar)

(Additional reporting by Adam Jourdan in Shanghai; Editing by Stephen Coates)

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