Bellamy’s Australia Ltd (ASX: BAL) shareholders awoke this week to the sweet news that their company would be taken over at a whopping premium of 59%.
Bellamy’s is one of the three major Aussie infant formula makers (aka “white gold”) alongside a2 Milk Company Ltd (ASX: A2M) and supplements business Blackmores Limited (ASX: BKL). Founded in 2004 in Launceston, Tasmania, Bellamy’s prides itself on its organic range of infant formulas and food.
That’s A Big Premium…
While Bellamy’s is undoubtedly an impressive business, I think it should be asked by regulators (FIRB), the Government and newborn parents what would make one company takeover another company for 59% more than the going price of the shares?
Obviously, Bellamy’s must be an extremely important asset to the buyer. Perhaps it’s more important and valuable to them than anyone else on the planet?
The buyer is Hong Kong’s China Mengniu Dairy Company Limited (SEHK: 2319), one of China’s leading dairy product manufacturers with a market capitalisation of around $24.6 billion.
According to Fairfax, Mengniu Dairy is 16% owned by Cofco. Cofco is owned by the Chinese Government.
A Fallen Formula Angel
Investors with a memory that goes back a few years will know that the Chinese government clamped down on foreign infant formula makers some years back.
Even highly regulated, high-profile Australian infant formula makers like Bellamy’s were forced to contend with uncertain regulatory changes and scrutiny .
The only way to describe what happened to Bellamy’s shareholders at the time was an annihilation of their investment.
With a month-long trading halt on the ASX, Bellamy’s shares went from almost $12 in late 2016 to less than $4 by the end of January.
Clearly it would be compelling for buyers of Bellamy’s shares if they were confident on the ability of the company to execute their growth plans in China.
Bellamy’s has been waiting around 20 months to be approved and licenced to sell its infant formula in Chinese retail stores.
However, Bellamy’s CEO Andrew Cohen told Fairfax that he doesn’t think the takeover, “would change the likelihood of achieving that licence, or when it would be achieved.”
Hurdles Remain
You need only search the internet for “infant formula Coles and Woolworths” to learn about all of the troubles Australian mothers and fathers have had trying to source Australian made infant formula for their newborns.
Not only that, you need only read the news regularly to hear about Australian farming and agricultural products being sold off to Chinese investors and buyers.
Foreign investment is a great thing for Australians — provided it’s in our country’s best interests — but I can see how the Bellamy’s takeover could become very political if given the chance.
The Foreign Investment Review Board (FIRB) will have its hands full with this one.
Let’s not forget it allowed the $290 million sale of Van Diemen’s Land Company go through but was split on the USA’s Archer Daniel Midland’s deal to buy Graincorp (ASX: GNC). The deal was eventually blocked by then-Treasury Joe Hockey.
What Now?
The Bellamy’s board, led by John Ho, has backed the deal, saying, “The proposed Scheme is an attractive all-cash transaction at a 59% premium to the prevailing share price.”
Ho added, “It reflects the strength of the Bellamy’s brand, the dedication of 160 passionate employees and the progress of our turnaround plan.”
With Bellamy’s shares now trading at the takeover-offer-adjusted price, I think it makes sense to watch this one from the sidelines.
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Disclosure: At the time of writing, Owen does not have a financial interest in any of the companies mentioned.
