Chinese to buy Synlait majority stake

From left: Synlait Milk chairman Graeme Milne, Bright Dairy & Food Co vice president Li Ke, Synlait Milk CEO John Penno. Photo / Supplied

A Chinese dairy giant has agreed to buy a majority stake in Canterbury milk processor Synlait Milk, subject to regulatory and shareholder approval, prompting a mixed response from Federated Farmers and Fonterra.

Bright Dairy & Food Co, which is listed on the Shanghai stock exchange and China's third-largest dairy company, yesterday announced it would invest $82 million in Synlait Milk, giving it a 51 per cent stake in the New Zealand firm.

The injection of Chinese cash would allow Synlait Milk - which abandoned a $150 million share offering last year due to poor investor interest - to complete the construction of a second milk processing plant at its existing site in Dunsandel, near Christchurch.

Federated Farmers dairy chairman Lachlan McKenzie said it was a "damning indictment on our capital markets" that funding for Synlait's expansion had to come from China.

Synlait chief executive John Penno said $100 million would be invested in the new plant, which would produce high-value infant formula.

Fifty fulltime jobs would be created when the new plant was commissioned, he added.

Formula produced at the Canterbury plant will be co-branded with Bright Dairy and exported to China, utilising the Chinese firm's extensive distribution network in that country.

Other markets would receive the formula under different branding, Penno said.

"This [investment by Bright Dairy] is about funding our growth strategy, and our growth strategy is all about us becoming a leading supplier of high quality, premium infant formula products."

Mitsui & Co, a Japanese company, will retain its 22.5 per cent stake in Synlait Limited.

New Zealand-made infant formulas are sought after in China, demanding a high premium as some Chinese parents still fear feeding locally made products to their children in the wake of the Sanlu melamine scandal, in which six babies died and thousands made sick after the industrial chemical was added to milk.

Penno pointed out that there were 60 million children in China under the age of 4, and the one child policy meant parents were prepared to invest a lot of money in each child, making it a lucrative market.

While the question of a link between Sanlu and Bright Dairy directors was raised by journalists in Parliament yesterday, a spokesman for Synlait last night denied any connection between the two firms.

Penno said the deal with Bright Dairy would be subject to approval by the Overseas Investment Office (OIO), as well as from Bright Dairy's investors in China.

But Penno was confident the deal would easily gain OIO approval, saying: "We don't have too many concerns in terms of regulatory approval in New Zealand as this investment is in processing and industrial manufacturing, not in sensitive land."

The land on which the existing and future processing facilities are located, around 49ha, will remain in the ownership of Synlait Limited, a separately owned entity to the processing arm Bright Dairy is investing in.

Penno said if Synlait Milk were to take ownership of the land in the future, further OIO approval would be required.

Bright Dairy president Benheng Guo said the deal with Synlait was the Chinese firm's first investment in an overseas processing facility. "In China the market for premium products from New Zealand and Australia is growing rapidly," he said.

The milk required to supply the new plant would come from Synlait Limited's farms, as well as Synlait Milk's third-party suppliers and Fonterra, which under the Dairy Industry Restructuring Act is obligated to supply 20 per cent of the milk needed by Synlait.

Fonterra's managing director for trade and operations, Gary Romano, said independent operators such as Synlait used the act's regulations to their advantage - filling their processing plants when milk supplies were low.

"We don't think its right that Fonterra should be required to supply raw milk to Open Country Dairies, Westland Tatua, Synlait or New Zealand Dairies when they have their own farmer supply base," said Romano. "It actually decreases competition."

Penno said that as Synlait expanded, it was decreasing its reliance on Fonterra.

"We have a list of farmers who want to supply us with milk ... we'll be working with local farmers to bring on the milk that we need to fill up the expansion."

In the North Island, Natural Dairy (NZ) Holdings, which is awaiting OIO approval to buy the 16 Crafar Farms, was also interested in setting up dairy processing facilities.

BUYING IN

Bright Dairy & Food Co:

* Founded in Shanghai in 1949.

* China's third-biggest dairy company.

* Listed on the Shanghai Stock Exchange with a market capitalisation of $1.7 billion.

* Revenue of about $1.6 billion in 2009.

* 65 per cent owned by its parent company - the Bright Food Group - which is in turn is owned by the Shanghai local government.

Synlait Milk:

* Launched in 2005 to process milk provided by Synlait Limited's farms, as well as third-party suppliers.

* Undertook an unsuccessful IPO last year, aborted due to low investor interest.

* Will have a revenue of $220 million this year.

* Processing facilities will be worth more than $200 million on completion of its new plant.