Chinese dairy giant Yili moves into Pakistan to escape ghost of milk scandals in home market
The country’s milk firms are still struggling in the aftermath of the melamine contamination scandal of 2008 which killed at least six children
China’s biggest maker of dairy products, Yili Group, said it plans to take a majority stake in Fauji Foods, a unit of a Pakistani fertiliser manufacturer, in a bid to expand its overseas presence.
In a company filing on Tuesday, the Shanghai-listed company said it has submitted a letter of intent to acquire a 51 per cent stake in Fauji Foods, which is engaged in the processing and marketing of dairy products, juices and jams in Pakistan.
It did not disclose any financial details about the potential deal, and neither company immediately responded to requests for comment.
Yili said it has assigned Citibank N.A. Pakistan to submit the letter to both the dairy maker and the South Asian country’s securities regulators. Both Fauji Foods and its parent, Fauji Fertilizer Bin Qasim (FFBL), are listed on the local bourse, and the deal pends approval from shareholders and board members at both Yili and the two Pakistani companies, as well as the authorities of both countries.
“There is still huge uncertainty on whether the deal could be closed,” Yili said in the filing.
The largest dairy producer in Asia and the eighth largest in the world, state-owned Yili started off as a small dairy-product processing factory in Inner Mongolia in 1993.
It has been lauded as a national champion in an industry which has been slowly recovering from a contamination scandal 10 years ago when the domestic brand Sanlu’s milk powder was found to contain melamine. Sometimes added to milk because it can increase the protein level, it led to the deaths of several infants in Sanlu’s case.
As such, international dairy brands, including Wyeth and Paris-based Danone, enjoy market share well above 50 per cent in China.
To compete with its global peers, part of Yili’s strategy is to boost its international presence in a bid to expand sales channels and find cheaper raw materials. Pakistan seems a good fit because it has one of the world’s biggest herds and is the fourth largest milk producer in the world after China, the US and India, according to Pakistan Today, an English-language daily newspaper.
“The deal could help the company to expand its sources of good quality raw materials and is therefore very significant,” said Zhu Danpeng, an associate with the China Branding Research Institute.
“The internationalisation of Chinese companies is inevitable, the only question is which approach is best for them,” said Zhu.
Yili launched its first major overseas dairy factory in New Zealand in 2014. It also has a partnership with Italian dairy giant Sterilgarda Alimenti, and a European research and development centre in the Netherlands, the first such overseas facility for a Chinese dairy company. Yili reported 5.9 per cent growth in net profit last year to 6 billion yuan (US$760 million).