Yili Group

Yili buys China’s largest organic milk producer, issues poison pill to deter insurer’s hostile takeover

Yili will issue 9 billion yuan of shares to buy control of Hong Kong-traded China Shengmu Organic Milk, as well as dilute Sunshine Insurance’s stake

PUBLISHED : Monday, 24 October, 2016, 1:47pm
UPDATED : Monday, 24 October, 2016, 11:00pm

Inner Mongolia Yili Industrial Group Company has announced a 4.6 billion yuan (US$679 million) takeover of China’s largest producer of organic milk, and issued new stock to create a so-called poison pill to ward off a potential hostile takeover from its third-largest shareholder.

Yili said it would issue 9 billion yuan worth of new shares to acquire four new investments, including a 37-per cent controlling stake in Hong Kong-traded China Shengmu Organic Milk. The issuance will dilute the stake held by Yili’s third-largest shareholder Sunshine Insurance Group to less than 5 per cent, fending off a possible takeover by the insurer.

“It’s only the first step in Yili’s defence taken by the corporate board, to make the company hard to take over,” said Shen Meng, executive director of Chanson Capital, a boutique investment bank.

Sunshine used one of its property units to buy 1 per cent of Yili’s shares, emerging as the dairy producer’s number three shareholder with a 5 per cent combined stake, according to a September 19 filing. The insurer pledged it wouldn’t add to its stake for another year, but not before raising concerns of another boardroom tussle similar to the Baoneng Group’s hostile takeover of real estate company China Vanke Company.

Sunshine insisted in its filing the stake purchase was a “financial investment” intended to help the firm’s “future business development,” with no plan to become Yili’s largest shareholder, but analysts were not convinced.

After Yili’s latest manoeuvre, Sunshine’s stake would be diluted to 4.56 per cent, less than state-owned Hohhot Investment’s 8 per cent.

Yili, China’s largest dairy producer, has been stepping up its global brand marketing in recent years, as it seeks to overcome the damage done to the country’s dairy industry following a series of melamine contamination scandals in 2008.

Yili’s high-end Shuhua Milk featured in several Hollywood blockbusters, including the 2011 Transformers: Dark of the Moon movie.

Yili’s shares soared by their daily 10 per cent limit to as much as 17.72 yuan in Shanghai when trading resumed following a five-week suspension. The shares closed on Monday at 17.29 yuan, up 7.32 per cent. In Hong Kong, trading in Shengmu’s shares was halted from Friday. The stock rose 2.5 per cent Thursday to HK$2.43.

The Shengmu purchase could bolster Yili’s net profit by 6.8 per cent in the 2017 financial year, according to an estimate by China International Capital Corp.

Besides buying Shengmu, Yili plans to use proceeds from its shares issuance to invest in an operation centre and a milk production line in New Zealand, according to its filing to the Shanghai bourse.

“Yili has a massive market capitalisation of 100 billion yuan, so it will work better if the size of the takeover target accounts for 10-15 per cent of its entire market cap, but this time the two deals are both too small to make a huge difference,”said Chanson’s Shen.