China Huiyuan Juice Group plans to acquire fruit planting and juice-concentrate-making businesses from its founder and chairman, Zhu Xinli, as it seeks to bolster investor confidence.
The company said after the market close yesterday the transaction, valued at HK$4.9 billion, would help enhance its profitability while creating a vertically integrated business model for the Huiyuan brand.
The firm now deals with only downstream businesses including bottling and sales of Huiyuan-branded products.
The acquisition of the upstream assets from Zhu could shore up Huiyuan's earnings and enhance the transparency of its business operations, the company said.
Nearly all raw juice needed by Huiyuan is now supplied by Zhu's own businesses, with the amount reaching 1.25 billion yuan (HK$1.5 billion) last year.
Huiyuan is the mainland's largest juice brand in terms of sales.
Zhu said the decision to merge with the upstream assets reflected confidence in the mainland's juice market as consumers became increasingly aware of food safety.
"Chinese people are increasingly caring more about the health benefits of different food and drinks," he said. "I am bullish about the company's outlook."
Mainlanders drink an average of about one litre of juice a year. Zhu said he hoped that would increase to 5 to 10 litres.
Under the deal, Huiyuan would use bank loans to repay HK$1.5 billion owed by Zhu's upstream businesses.
It would also issue 1.1 billion shares to Zhu at HK$3.10 each, a discount of 5.2 per cent to the stock's close yesterday.
Among the shares issued, 655.3 million are convertible preferential shares.
Zhu's stake in Huiyuan would increase to 68.3 per cent from 41.9 per cent after the deal.
The transaction, expected to be completed in the third quarter, is subject to independent shareholders' approval.
"Existing shareholders' ownership in Huiyuan will be diluted after the acquisition but they will be rewarded with an increase in the company's earnings," Zhu said.
Huiyuan reported a net profit of 16.16 million yuan last year, compared with 310.5 million yuan in 2011. Revenue rose to 3.98 billion yuan from 3.83 billion yuan.