Bright Dairy joins food merger

Union of four state-owned firms will result in a company with 46b yuan in assets and 28b yuan in annual sales

Bright Dairy & Food, China's third-largest dairy products maker, will merge with three other major state-owned food companies amid intensifying competition and falling profits.

The merger with Shanghai Sugar Cigarette & Wine (Group), Jinjiang Food and Shanghai Gong Nong Shang Group, all listed on the Shanghai stock market, will form a firm that has nearly 46 billion yuan in assets and annual sales of 28 billion yuan.

The new company, Bright Foods Group, would include the most famous brands of the Shanghai food industry in tinned meat, liquor, soft drinks, biscuits and dairy products, the companies said in a joint statement yesterday.

The merger was in line with an instruction from higher departments and with the demands of reforming state companies, the statement said. It did not give more details.

The new firm would have upstream and downstream capabilities from production and processing to distribution and retail, said Shanghai Securities analyst Chen Gang.

Last year, the companies reported combined sales of 28.3 billion yuan, net profits of 470 million and had assets of 45.8 billion yuan.

'The city government sees increasing competition from foreign and non-Shanghai companies in the food sector, which is among the most liberalised in China, and believes that the new firm will have economies of scale, enabling it to compete better,' said one analyst who declined to be named. 'It is also a strategy to prevent them being taken over by foreign rivals.'

Investors welcomed the news, with Bright Dairy's shares closing yesterday at 7.87 yuan, up 3.2 per cent on the day.

However, the merger will probably derail hopes of France's Danone, Bright Dairy third-largest shareholder with a 20 per cent stake, to take a majority stake.

Bright Dairy, one of Shanghai's most famous brands, ranks third in the dairy industry after Inner Mongolia Yili Industrial Group and Hong Kong-listed China Mengniu Dairy, and is under intense pressure for third place from Sanlu Group, based in Shijiazhuang, capital of Hebei province.

Last year, the revenue at Yili rose 39 per cent to 12.2 billion yuan, Mengniu was up 50 per cent to 10.8 billion yuan. Bright Dairy rose only 1.74 per cent to 6.9 billion yuan.

In the first quarter, Bright Dairy's revenue was 1.63 billion yuan, unchanged from the same period last year while its net profit fell 47 per cent to 36.1 million yuan.

Sales of its products were badly hit after media reported last year that one of its factories in Zhengzhou, capital of Henan province, had recycled out-of-date milk.

After the report, the company's share price on the Shanghai stock exchange fell on five consecutive trading days, losing more than 100 million yuan in market value.

The firm has also fared poorly with acquisitions of dairies outside Shanghai, in Jiangxi, Tianjin and Jingyang, which have all posted losses.