Chinese milk company Mengniu Dairy has made an offer to take over Australian milk producer Bellamy for $1 billion. The acquisition is part of the Chinese firm's push to aggressively expand its business overseas.
The Inner Mongolia-based company announced on Monday that Bellamy had already accepted their offer and that they were just waiting for approval from Australian regulators.
According to the company's filing to the Hong Kong Stock Exchange, the deal is still subject for review by Australia's Foreign Investment Review Board. The deal has to be approved by the regulator before it is allowed to proceed.
Mengniu's offer represents a 59 percent premium over the Australian company's market valuation. Bellamy's closing price as of Friday last week stood at AUD$8.32 per share. Mengniu will be paying AUD$13.25 per share to fully acquire the company.
To justify its expensive acquisition, Mengniu mentioned in a statement that Infant milk formula, which is the focus of Bellamy's business, is becoming one of the largest and fastest-growing segments in China. The demand for the product is reportedly continually growing as the country sees an increase in disposable income and child spending.
The company also stated that it sees huge potential in the segment, given its plans to further penetrate into lower-tier cities where birth rates and relatively higher.
Mengniu currently owns Burra Foods, which has dairy processing plants in Australia. The company plans to integrate both companies to bolster production to meet the rising demand in China.
According to the analysts, Mengniu likely wants to meet the growing demand in China first, before tackling the international market. The acquisition is likely its way of cornering the domestic market first by takeover popular brands.
Bellamy is already a well-known brand in China ever since consumers were able to get access to the product thanks to cross-border e-commerce platforms.
Chinese parents with higher amounts of disposable income tend to spend more on imported infant milk products, which they perceive as higher quality. Mengniu aims to capitalize on this trend by essentially controlling the supply of one of the more popular imported brands.
Last year, China imported milk products worth an estimated $2.43 billion. This was a significant 12 percent increase when compared to the past year.
The use of imported milk is estimated to account for over 8 percent of China's total milk powder sales. Total milk powder sales in China last year reached around $3.1 billion, which was an 18.6 percent year-on-year increase. Based on the trend, market analysts predict that milk power sales could increase by as much as 33 percent in 2020.