Sanyuan acquisition to shore up Sanlu's sales by 30 percent

Beijing Sanyuan Food Co Ltd is ready to take over the assets of Sanlu, and the acquisition is expected to recover about 30 percent of Sanlu's sales this year, Sanyuan executives said.

Sanyuan planned to bid for Sanlu assets with funds ranging from RMB800 million to RMB1 billion. The funds will be raised through non-public sale of Sanyuan shares to its parent company Sanyuan Group and affiliate Hebei Sanyuan.

However, analysts are worried about the prospects of the transaction, saying the deal is not that appealing given the high price Sanyuan had to pay. Also, the ongoing slump in the dairy market, fierce competition as well as doubts as to whether Sanyuan could manage Sanlu's assets clouded the prospects.

Sanyuan will go through a bidding-related procedure and hand in a cash deposit worth RMB200 million to the commercial bank appointed by Sanlu. Bidding for the assets of Sanlu will commence Wednesday (Mar 4) in the Intermediate People's Court of Shijiazhuang.

Sanyuan is expected to become a national brand and expand its production line by leveraging the Sanlu acquisition deal. When the deal is finalised, Sanyuan's milk powder business will target the mid- and high-end market.

Sanyuan had begun renting and operating six Sanlu facilities in late December 2008.

Rating on the deal remains neutral as Sanyuan is not expected to gain a sharp competitiveness as soon as expected, said Guo Shengchang, senior dairy analyst from Shanghai Securities.

The milk powder industry is highly competitive, with international brands holding the high-end market and the local brands holding the mid- and low-end sector.