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Breakingviews - Australian milk deal looks a little too local

Vegemite pots are seen in a supermarket in central Sydney, Australia, February 8, 2018. REUTERS/Daniel Munoz

HONG KONG (Reuters Breakingviews) - Australian cheese-maker Bega could buy Lion Dairy for $402 million after the government blocked a Chinese buyer. A local champion might consolidate the domestic market, but there are few substitutes for demand from the People’s Republic.

An offer from China Mengniu Dairy was the first to be blocked by the Foreign Investment Review Board after Australia shook up investment law in July. Mengniu’s state-owned shareholder COFCO Dairy played poorly in Canberra as the relationship with Beijing soured. Local media reported that the deal curdled thanks to “diplomatic issues”.

But given Bega Cheese’s interest, Lion’s Japanese owner Kirin can relax. The price has barely changed despite a tumultuous year, and shareholders will be glad to be rid of a subsidiary that mixed oddly with a portfolio of boozy beverages.

However, Lion’s employees and suppliers, including more than 550 farmers, have less to celebrate. A sale to Mengniu would have helped to tap the Chinese market, which is almost eight times larger than Australia’s, and growing faster too. Last month, New Zealand-based rival Fonterra said demand for its milk in the country was so strong that it would raise the price at which it buys milk from farmers. Thanks to that, Chief Executive Miles Hurrell expects some $6.6 billion of revenue to flow into New Zealand in the current fiscal year. Without Mengniu, Lion is unlikely to generate anything like that Down Under.

Beijing’s retaliation for perceived Australian slights has exposed how dependent adjacent industries are to Chinese consumers. Treasury Wine Estates, for example, has seen its share price fall by more than a third this year as anti-dumping duties threatened exports to China.

There is some consolation to be found at home. Bega, which owns the iconic spread Vegemite, is building up an impressive array of brands. Adding Lion products like Yoplait and Farmers’ Union will give the $795 million company a local edge over rivals in a fragmented market. Although Bega is among the country’s top ten dairy companies by sales, its market share was less than 3% in 2020, according to Euromonitor. Given the political realities, there’s no use crying over spilt milk, but it is hard to deny the waste.

(This item has been corrected to refer to the farm-gate price, not product price, in paragraph 4.)

Breakingviews

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