New Hope Dairy, a subsidiary of Sichuan New Hope Agribusiness (000876.SH), has completed a full takeover of Anhui Purity Dairy, paying US$3.9 million for the 41% o the company it didn’t already own. New Hope Dairy has so far acquired 12 small- and medium-sized dairies in Anhui, Hebei, Jilin and Shandong provinces as it looks to expand operations throughout China.
The acquisition follows on the heels of a 10-day nation-wide probe into dairy products suspected to be tainted with melamine. The crackdown resulted in the seizure of 170 tons of milk powder, the closure of two companies in Ningxia and several arrests. Smaller dairy producers like New Hope have an opportunity to speed up targeted acquisitions as market leaders Yili (600887.SH) and Mengniu (2319.HK) slow the pace of their consolidation in the wake of the 2008 milk scandal, analysts said.
The creation of a food safety commission by the State Council is a sign that Beijing is taking food safety more seriously and will step up quality checks to prevent toxins like melamine from entering the food chain. Dairies expanding operations through mergers and acquisitions will need to invest heavily in due diligence and internal controls to prevent their brand names – and their revenues and stock prices – from taking another hit.