Sunday, October 9, 2011

Nestle Successfully Takes Over Yinlu

Nestle (China) Ltd., (Nestle),the largest food company of the world, and Yinlu Food Group Co., Ltd. (Yinlu), a large producer of peanut milk and canned rice porridge, formally signed an acquisition agreement in the Fifteenth China International Fair for Investment and Trade on September 8, 2011, according to CCM’s September issue of China Agriculture Investment Bimonthly Report.

Nestle and Yinlu signed a strategic cooperation agreement on April 18,2011 and Nestle got the approval of the acquisition from Chinese Ministry of Commerce on August 26, 2011. According to the acquisition agreement, Nestle will buy 60% shares of Yinlu. Meanwhile, Nestle and Yinlu will respectively invest USD240 million and USD160 million in constructing new plants. Moreover, the acquisition will be finished in November 2011.

Both Nestle and Yinlu believe that the acquisition will be helpful for both to exploit more shares in domestic and overseas food markets. Nestle is attracted to the acquisition of Yinlu because of Yinlu's good brand effect in protein beverage and eighttreasure congee, stable product quality and the excellent management capability. Although domestic milk beverage industry has been suffering in recent years from many negative news about product quality, such as the melamine incident in 2008, Yinlu has been successfully keeping product quality stable and has received recognition from more and more domestic consumers. Meanwhile, Yinlu's sales reached above USD800 million in 2010, thanks to its good brand effect. Therefore, the acquisition can not only help Nestle to exploit domestic protein beverage and eight-treasure congee markets but also strengthen its brand influence in China.

On the other hand, the acquisition also can help Yinlu to expand its market share in a short term. According to the acquisition agreement, Yinlu will continue using its current brand and it will exploit food markets in the central and western regions of China through Nestle's existing production bases and the new plants invested by Yinlu and Nestle in these regions. In fact, with consumer confidence gradually declining in the European Union and the US, due to the financial crisis and debt crisis, Nestle has been actively accelerating the expansion of its business through acquisitions in China since 2010. Besides, Nestle's net profit has reduced by about 14% from about USD5.9 billion in H1 2010 to USD5.1 billion in H1 2011, due to the decreasing demand in the European Union and the US and increasing prices of raw materials. However, reportedly, the average growth rate of Nestle's sales in the emerging countries has reached about 8.7% in recent years; especially, the growth rate has reached above 10% in China.

As the largest bottled water producer in the world, Nestle has also been exploiting domestic bottled water market since 1997. Nestle successfully spent about USD11 million to get 70% shares of Yunnan Dashan Drinks Co., Ltd., the largest bottled water company in Yunnan Province, in February 2010. It is reported that Nestle also plans to merge other famous bottled water companies in Guangdong Province, such as Shenzhen Ganten Industry Co., Ltd. and Zhuhai Yonglong Jialinshan Mineral Water Co., Ltd.

Moreover, Nestle is also making efforts to expand domestic candy market shares through the merger of Hsu Fu Chi International Ltd. (Hsu Fu Chi), a large candy producer in China. Nestle announced to spend USD1.7 billion to buy 60% shares of Hsu Fu Chi on July 11, 2011. Moreover, Nestle and Hsu Fu Chi expected to get approval on the acquisition from Chinese Ministry of Commerce before March 2012. Currently, Chinese Ministry of Commerce is examining and approving the acquisition according to the Chinese Antimonopoly Law. According to data from Euromonitor International Ltd., a multinational company engaged in strategy research for consumer markets, the total candy sales of Hsu Fu Chi and Nestle were respectively in the third and fifth place in China in 2010.

Therefore, after the acquisition, Nestle will obviously strengthen its competitiveness in domestic candy market. Based on the above facts, Nestle may continue to exploit new markets in China through acquisitions, in order to keep its profit increasing fast.

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China Agriculture Investment Bimonthly Report, which is a bi-monthly newsletter published by CCM International Limited, offers timely update and close follow up of Chinese agricultural industry, analyzing market data and trends, as well as related policies. Major columns include policy and legislation, industry dynamic, company dynamic and price update.

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