First a Chinese company wanted to buy Smithfield Foods, Inc. (NYSE:SFD), the world’s biggest pork producer and processor. Now a Chinese company is seeking to acquire one of China’s biggest baby formula companies, reports DealBook’s Neil Gough.


Mengniu Dairy Seeks To Buy Yashili International

China’s Mengniu Dairy, which is the largest dairy producer in China, made a $1.6 billion bid for Yashili International today. This comes after a scandal revolving around baby formula that was found to be tainted. Yashili International is one of China’s leading producers of baby formula and baby food, and the bid is a 5.1 percent premium over the last trade of Yashili’s stock before the suspension of trading on shares of both Yashili and Mengniu Dairy on June 13.

The Baby Formula Scandal

In 2008, Yashili was one of 22 Chinese baby formula producers making products that government quality control inspectors said was contaminated with melamine, an industrial plastic. The plastic caused kidney problems in hundreds of thousands of babies in China.

The company said dealers of raw milk were to blame because they were trying to boost their milk’s protein content artificially. It then suspended production of its formula and recalled several of its products. It lost about $130 million at today’s exchange rates on those recalls.

Almost two years after the baby formula scandal, Yashili decided to start buying all of its raw milk powder from suppliers overseas, mostly those in New Zealand. The company was able to raise $350 million in a stock listing in Hong Kong after convincing consumers and investors that it was making big changes to prevent another baby formula scandal.

Mengniu’s Plan To Buy Yashili

Mengniu said today that it doesn’t believe the policy regarding overseas raw milk will change at Yashili after it acquires the company. It also said it has collected acceptances that cannot be revoked from the Zhang family, which owns more than half of Yashili’s shares, and the private-equity firm Carlyle Group, which holds a 24 percent stake.

Shareholders of Yashili will be able to choose whether they want to accept cash at a value of $3.50 per share or a combination of $2.82 per share and .681 of a share in the new company that will be set up by Mengniu purely as a holding company for Yashili. Mengniu said if at least 90 percent of Yashili shareholders accept its offer, it will begin a compulsory buyout of the shareholders who are holding out and then delist the company according to the rules of the Hong Kong stock exchange.