• Sat
  • Dec 27, 2014
  • Updated: 11:43pm
PUBLISHED : Saturday, 22 June, 2013, 12:00am
UPDATED : Saturday, 22 June, 2013, 3:55am

Dairy duo must show that someone is not milking the deal

First came the fund-raising, then the dividend payouts, and now the takeover offer from Mengniu. Yashili's about-turn needs to be explained

China Mengniu Dairy's planned takeover of baby formula milk producer Yashili International is an important case to study. It is not about the consolidation of the country's dairy industry but our regulatory regime.

On Tuesday, Mengniu said it would buy all the shares of Yashili at HK$3.50 each, 9.4 per cent above the latter's last closing price. That priced Yashili at HK$12.4 billion.

The deal shed new light on a surprising and puzzling decision by the Yashili board on May 3 to pay a special dividend of one billion yuan (HK$1.2 billion).

It is surprising because that's only a month after Yashili announced a final dividend of 400 million yuan, equal to 85.4 per cent of its 2012 profit. It is puzzling because that's only two years after Yashili had raised 1.6 billion yuan via a Hong Kong listing and only weeks after it won approval to build a 700 million yuan plant.

Back then, Yashili said the special dividend was paid "in recognition of the continual support of the shareholders as it has excess cash for the group's present and future funding requirements".

If it doesn't appear to make any sense financially to Yashili, it makes every bit of sense for Mengniu as a buyer. The special dividend reduced Yashili's net asset value - four billion yuan at the end of last year - by one billion yuan.

Had this not been done, Mengniu would have had to offer a higher acquisition price with a higher cash element to Yashili's shareholders. This would mean a higher gearing for Mengniu, which is borrowing to pay for acquiring Yashili and another dairy producer, China Modern Dairy. The bill for both deals stands at HK$16 billion.

The big question is, when Yashili paid the special dividend was the board aware of Mengniu's planned offer? This would be price-sensitive information. If it has nothing to do with the acquisition, what changed in Yashili's operations and financing plans in the 40 days after its final dividend announcement that the board found it appropriate to dish out more than a third of its cash while the firm is expanding?

By the way, there is also an interesting coincidence that the company should explain. In announcing the special dividend, it said the special and final dividends would be paid only to shareholders whose names appeared on the registrar on June 13, instead of June 17 as stated in its earlier announcement on the final dividend. Yashili suspended its share trading on June 13 before announcing Mengniu's acquisition.

From this year, regulators have made it mandatory for listed companies to disclose price-sensitive information. This appears to be particularly relevant when one looks at Yashili's price chart.

Mengniu's appetite for acquisitions was first made known by a Merrill Lynch research report in mid-December. A month later, Mengniu's chairman Frank Ning confirmed that the company was talking with China Modern. From then, Yashili's price and trading volume began rising in line with China Modern's. Between January and March, Yashili's shares rose 60 per cent and its daily trading volume averaged eight million shares, compared with a few million in 2012. But from April, the performances of Yashili and China Modern began to diverge; Yashili's price headed up while China Modern's went south. The gap continued to widen. This is despite announcements by Mengniu and China Modern on April 24 that they were having informal talks "regarding a possible acquisition of certain assets". Yashili had said nothing.

(It all made sense on May 8 when Mengniu announced a purchase of China Modern Dairy's controlling stake only. No general offer was made.)

Between April 1 and June 13, Yashili gained 40 per cent compared with China Modern's 0.39 per cent rise. During the period, the former's average daily trading volume stood at 12 million shares, compared with the eight million average in the first three months of the year.

Shareholders may well wonder what caused Yashili's share to jump from HK$2.365 to HK$3.33, which is way above the special dividend of 28.25 fen.


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This article is now closed to comments

no clarification so far.
would somebody from scmp deal with this?
hi shirley, i guess u mixed up the 'latest lodge date' and 'record date'.
and your statement containing in this article re change of recird sate is inaccurate.
as a responsible media, scmp should make a clarification.
hi shirley. that means for those shareholders who wish to entitle to special div, must register their shares by the close of business on 13 jun.
14 to 17 jun is the close period
then company registrar will take a snap shot on 17 jun
we call 17 jun 'record date' which determines the shareholder entitle to dividend
so 17 jun is the record date, which is consistent with the previous disclosure in the results announcement and agm notice.
Thanks for your interest. I have copied below the May 5 announcement for your information.
"Shareholders are reminded that the register of members of the Company will be closed from 14 June 2013 to 17 June 2013, both days inclusive, during which period no transfer of shares of the Company will be effected. In order to qualify for the proposed final dividend and the proposed special dividend, all duly completed and signed transfer forms accompanied by the relevant share certificates must be lodged with the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration no later than 4:30 p.m. on 13 June 2013."
Dear Shirley, Just want to clarify some points with you:
1. You stated that: "The big question is, when Yashili paid the special dividend was the board aware of Mengniu's planned offer? This would be price-sensitive information..." Please note that with effect from 1 Jan 13, provision in relation to "price-sensitive information" under Listing Rules has been changed to "inside information" under Part XIVA of SFO.
2. You stated that Yashili changed its record date of special and final divided from 17 June to 13 June. This is not true. Yashili's announcement of 5 May 2013 stated that the special dividend and final dvidend will be paid to shareholders who appeared in the company's book on 17 June 2013. Please also note tha 13 June 2013 is the lates lodge date of shareholders.
As a reader, I appreciate your analysis and sensitivity to the market. However, the above two points are clear facts, which requires accuracy. Could you possibly take a look at it and make some clarifications?
More great reporting from Shirley. What I would like to see someone do is an investigation of China's high speed rail industry. Corruption in the industry is well known. What isn't well known is that the industry is probably very much under-resourced and under specified. That is the industry used equipment and technology that is not likely to hold up very well, so that in as little as 5 years China's high speed rail lines would mostly be operating at low speed, because the equipment could not hold up to the standards high speed rail requires. I have seen that under-resourcing is the norm in the Chinese power generation industry and I suspect the same is the case in the rail industry but I have no proof other than a comment from a British rail engineer that I saw several years ago, making this very allegation. Some people from Alstom and other rail industry suppliers would probably offer some insight.
Is it related to this article, Mr. Dunn?


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