A massive premium for investors. A brutal squeeze on short sellers. A conspiracy theory involving the Chinese government. A potential foreign investment pressure point for the federal government.
The $1.5 billion takeover of baby formula maker and one-time market darling Bellamy’s Organic by China Mengniu Dairy Company has more layers than your average deal – and that’s before you remember that it involves a company that was close to collapse less than three years ago.
That a takeover offer might arrive for Bellamy’s isn’t necessarily a surprise after a stock plunge of 62 per cent in 18 months. That a bid might come from China wasn’t completely unexpected either.
For about 18 months, Bellamy’s has been desperately trying to secure registration from China’s State Administration for Market Regulation agency to be able to sell its flagship organic baby formula in Chinese retail outlets. SAMR approval is needed under a regulatory regime that Beijing brought in from January 1 to try to streamline the formula industry.
But the approval hasn’t been forthcoming. This has weighed heavily on Bellamy’s share price, which plunged from a peak of $22.08 on March 23, 2018, to close at $8.32 on Friday.
That share price weakness has given Mengniu the opportunity to strike. It won the unanimous backing of the Bellamy’s board with an all-cash, $13.25 a share offer – a premium of a staggering 59 per cent to Friday’s close, but a long way from the $22 that investors saw 18 months ago.
That massive premium is very bad news for the short sellers that have crowded into Bellamy’s stock as the company struggled to get its SAMR registration; short interest has leapt from under 5 per cent to a tick over 15 per cent in the past 12 months.
Those short sellers watched the Bellamy’s stock soar 55 per cent at the open to $12.89. Ouch.
But the short squeeze isn’t the only drama here. What makes the deal extra spicy is that Mengniu, which is listed on the Hong Kong Stock Exchange, just happens to be 16.2 per cent owned by COFCO, a Chinese government-owned food conglomerate.
In these days of sadly heightened trade tensions, conspiracy theorists could have a field day with the idea of the Chinese government refusing to give Bellamy’s the licence it needs to sell in China, and then backing a takeover bid for the very same company.
You’d have to think the SAMR licence approval might not be too far away now, although Bellamy’s chief executive Andrew Cohen on Monday denied that Mengniu’s ownership would “fast-forward the process or guarantee any licences. I am not sure that’s the rationale for the deal.”
Bellamy’s and Mengniu are well known to each other as competitors in China, but also have a commercial relationship via a New Zealand business called Yashili. Bellamy’s produces Yashili formula at its factory in Camperdown in regional Victoria; Mengniu owns about 50 per cent of Yashili.
It is understood that while Bellamy’s and Mengniu have held informal discussions over the past six months, formal negotiations really hotted up over the last two weeks.
On the Bellamy’s side the talks were led by the deputy chairman of the board, John Murphy, and chairman John Ho, whose investment group Janchor Partners owns a 7.73 per stake in the group and so will take a tick under $116 million off the table in this deal.
Ho told an investor call on Monday morning that the offer is a good result for investors, which he said “crystallises the value of the Bellamy’s business at this point”.
Murphy said the board did not run a sale process that saw other bidders compete, but he was confident that the process was rigorous and had carefully considered the value of the business now and as against its turnaround plan.
“We’ve weighed this up very carefully against all options … and on balance we believe this offer is compelling. “
Cohen was also notably keen to reinforce that Mengniu is promising to maintain Bellamy’s as an Australian business, with local operations and management. This will likely be an important part of Bellamy’s pitch to assuage any concerns at the Foreign Investment Review Board about the deal.
FIRB really shouldn’t have any major issues here. Bellamy’s is a manufacturing and marketing company and doesn’t own a cow, a paddock or any other critical agricultural infrastructure.
But the Bellamy’s camp is clearly alive to the fact that given the current trade tensions, it wouldn’t be hard for a political voice to make a noise around the deal, particularly given the idea of Australian supermarket shelves being stripped of formula by Chinese buyers has been controversial in the past.
And given Bellamy’s Tasmanian heritage, it’s not impossible to imagine someone from the state – perhaps even independent senator Jacqui Lambie – raising some concerns.
Finally, there’s a neat bit of symmetry in Mengniu buying Bellamy’s. The Chinese group was, in part, responsible for the incredible rise of the Australian company that saw it go from Tasmanian start-up to an ASX darling that was worth as much as $2.5 billion.
Mengniu was one of the Chinese dairy groups caught up in the melamine milk contamination scandal in 2008 that saw Chinese consumers turning to Australian baby formula products, and sparked an export boom for the likes of Bellamy’s and, later, The a2 Milk Company.
That boom would eventually turn sour for Bellamy’s in late 2016, when a string of problems saw trading in the company’s shares halted for weeks and its CEO and chairman depart. A recapitalisation led by John Ho and original investor Jan Cameron eventually stabilised the business in early 2017; Ho bought in at around $4 a share.
Although Ho and Cameron will be among the biggest beneficiaries of this deal, they’ve had to wade through no shortage of cow dung to get there. (Source: afr.com)