China’s Foray Into Foreign Brands
Over the past several years, we have seen increasing instances where Chinese companies have sought acquisition targets abroad. In 2005, Lenovo Group bought the hardware computer business of International Business Machines for $1.8bn, while the Chinese automaker Geely recently purchased the German icon Volvo also for $1.8 billion. We’ve seen numerous minority investments by Chinese companies, often in the resource sector. Aluminum giant Chinalco (also known as Aluminum Corp of China Ltd) bought a 12% stake in Anglo-Australian miner Rio Tinto in 2008 while CNOOC (“China National Offshore Oil Corp”) paid $2.2bn to Chesapeake Energy earlier this month for a one-third interest in its South Texas oil and natural gas shale project.
In most of these cases, the implied investment rationale has been China’s desire to either expand its global reach or to gain access to much needed natural resources. Return on capital considerations can sometimes take a backseat to other concerns, such as fulfilling certain broader economic goals that the Chinese government hopes to achieve through the acquisitions. In all of the above cases, the acquirers are partly state-owned.
In October, however, we saw the potential for a different sort of acquisition involving a Chinese suitor and a foreign target. In late September, Bright Food, a Chinese food conglomerate, announced that it was in exclusive talks to buy private equity-owned United Biscuits in an acquisition that would likely exceed $2 billion in value.
United Biscuits sells and manufactures a variety of packaged food products, including McVitie’s, Carr’s crackers, Jaffa Cakes, Hula Hoops, etc. Its history dates as far back as 1948 when two Scottish family businesses, McVitie & Price and MacFarlane Lang, merged their operations. Bright Food, on the other hand, is a majority state-owned Chinese enterprise with more than $5 billion revenue and a wide network of retail outlets in China.
The merger talks have since fallen apart, as was reported by the Wall Street Journal earlier this week. But if Bright Food had moved forward with the purchase, the transaction could have represented a seminal event within the universe of Chinese cross-border M&A. Whereas many prior acquisitions featured Chinese companies expanding abroad or gaining access to natural resources, a Bright Foods acquisition would have been an instance of a Chinese company attempting to take foreign brands and better integrating them into the Chinese market. Rather than trying to increase its business reach outside of China, Bright Foods would be using United Biscuits to accelerate its growth within China, via foreign brands rather than domestic ones. It would have been an example of a Chinese conglomerate attempting to use its local expertise to provide a better end-market for foreign goods.
The food sector in China has been benefiting from many of the same macroeconomic growth trends that we’ve seen in other Chinese sectors. Whether the industry is steel or chemicals or cell phones, China has been a more attractive place to sell one’s goods than most end markets in the developed world. Rapid GDP growth has meant that chocolates and biscuits are selling at a faster pace in China than in other countries. To take Coca-Cola for instance, unit case volume growth in China was 16% in 2009, compared to -2% in the United States. Yum! Brands is seeing a resurgence in its sales and share price, mainly because more than 40% of its sales are now in China, and those sales grew 20% in the most recent quarter.
Yet the problem for many midsize foreign manufacturers is that they haven’t been able to gain a foothold in China as successfully as some of their stronger global competitors. United Biscuits may very well be one of those brands. While Yum! and Coca Cola have the financial and operational resources to become dominant players in emerging markets, smaller outfits like United Biscuits often do not.
That is where Bright Foods can come in. Bright Foods is a leading provider of numerous Chinese foodstuffs, such as Da Bai Tu candy and various milk and yoghurt brands. The company can use its local competencies and distribution network within China to bring United Biscuits’ products to Chinese retailers. Foreign products often receive warm receptions from Chinese consumers, who may view them as more high-end than domestic products. Some domestic food producers have faced scandal due to low quality products, including Bright Foods’ own Bright Dairy & Food Co., which was among the more than 20 milk producers implicated in a 2008 scandal in which the industrial chemical melamine was added to milk powder that killed at least six children and sickened nearly 300,000 others.
Although talks between Bright Foods and United Biscuits appear to have collapsed, the Chinese conglomerate’s initial interest may be a harbinger of things to come. From a business perspective, Chinese firms could realize value by taking midsize yet reputable foreign brands, especially ones that lack ambitious multinational parents, and effectively introducing them to Chinese end markets.