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Wondersun may join Sanyuan in Sanlu takeover

By Yu Hongyan (chinadaily.com.cn)
Updated: 2008-10-10 22:09

Sanlu Group may be taken over by Wondersun Dairy Co Ltd and other dairy companies, including Beijing Sanyuan Food Co, the China Business News reported recently.

Liu Qingquan, board chairman of Heilongjiang Wondersun Dairy, confirmed their intention to acquire Sanlu Group in an interview with the paper, but declined to give any details.

Since late last month, Sanyuan had been regarded as the most likely potential buyer of Sanlu. The Shanghai-listed dairy producer has had its shares suspended since September 25, after it reportedly received a government notice on its merger with Sanlu, and the suspension will continue until a clear decision by the government.

Meanwhile, a Guangdong dairy producer also expressed its intention in buying two of Sanlu's 13 factories, but had cold response from Sanlu itself. Other sources also said that Sanlu may plan to resume its brand from scratch, which experts see little chance of succeeding.

Where the future of Sanlu has become a hot topic in the industry, and many problems have arisen with the acquisition issue.

An unnamed source analyzed the difficulties Sanyuan may confront in a merger with Sanlu. Sanlu had a sales income of 10 billion yuan in 2007, while Sanyuan only had 1.1 billion yuan ($161.16 million). Sanlu has established management offices in over 600 cities across the country, while Sanyuan concentrates only on North China, with Beijing as the major market. Moreover, Sanlu employed nearly 20,000 staff, four times that of Sanyuan. However, the two are close in term of total assets, with Sanlu holding 1.62 billion yuan worth and Sanyuan 1.3 billion.

"Things would be easy if it were only about capital", said dairy analyst Wang Dingmian to the China Business News. The biggest challenge is whether Sanyuan can actually digest the swallow-up.

As Wang pointed out, it remains to be seen whether Sanyuan can manage Sanlu's cross-country market outlay due to a lack of experience in market operation on the national level.

Another question comes from the breakdown of production capacity. Nearly five sixths of Sanlu's capacity can be attributed to milk powder products, with its sales income of 5 billion yuan, while Sanyuan's income in this sector was less than 1 billion yuan.

The proposal for Wondersun to take over sounds more reasonable. The Northeast China based dairy maker currently possesses 1.67 billion yuan of assets, runs 41 factories, and hires 11,000 workers. It had a sales income of 2.2 billion yuan in 2006, and its portion of milk powder to liquid milk comes to 6 to 4.

The adverse impact of Sanlu may also hurt other brands if bidders fail to handle the buying affair properly. Another concern is that Sanlu's fixed assets nearly dried up after the scandal as well as the depreciation of these assets.

"The result of the acquisition may not become clear in the short term ", said the unnamed source, "as they will find themselves in tremendous trouble before Sanlu finds its way out of the huge compensation payments.

Zhang Wenxin, a deputy with a Xinjiang law firm said to the paper that Sanlu could be acquired in two ways.

One is to take it over and bear the compensation and lawsuits.

According to Sanlu's rough estimation, they will have to recall 10,000 tons of milk powder with a compensation of 700 million yuan, excluding medical expenses for the affected babies. The potential victims may surpass 30,000 in China alone.

"No players in the market will act until the compensations and debts are figured out, unless special policies are otherwise specified by the government", said Zhang.

The other way is to sell Sanlu after its bankruptcy. As the liquidation process takes time, it is quite possible that Sanlu may be put under trusteeship by other companies to resume production, according to Zhang,

Fonterra Cooperative Group, the New Zealand company that is the second largest shareholder in Sanlu, gave their view in an interview with the China Business News. "It's too early to make the right judgment on Sanlu's future. It now faces serious challenges and we have revalued our investment. However, it still retains some prime assets."