FBA Issue 6: January / February 2006

 

Feed enterprise

Bringing New Hope to Liuhe and the Chinese feed industry

 

 

by FANG Shijun

 

IF ANY business development is to qualify for the Chinese feed industry's 2005 headline-of-the-year, it has to be the merger between feed giants New Hope Group (NHG) and Shandong's Liuhe. Barely seven months have passed since the merger was announced last May but analysts have agreed that this is one move that may just put the local feed business on the global map. 

 

News of the merger first broke out at an NHG press conference on May 18 in Beijing. Hosting the conference, NHG chairman Liu Yonghao revealed that cash had been paid upfront for an undisclosed amount of 40 percent of Liuhe's shares. Plans for further capital expansion and gradually raising NHG's stake in Liuhe were also in the pipeline, said the 54-year-old Liu, although adding quickly that the new NHG-Liuhe relationship should be described as "fair, strategic alliance" rather than an acquisition. 

 

Still, business analysts have not ruled out the possibility of an eventual takeover in the near future. The Sichuan-based NHG, touted as one of China's most successful home-grown businesses, has been aggressively expanding its operations all along the feed-to-meat chain, even moving on to new investment opportunities outside traditional agribusinesses. As the largest shareholder, NHG now holds Liuhe's financial reports. The rest of Liuhe's shares remain mostly in the hands of its previous shareholders Huang Bingliang, Zhang Tangzhi and Zhang Xiaochen, and the balance held by board executives.

 

Since taking on the role of chairman at Liuhe, Liu has wasted no time drawing out expansion plans for the group. By the third quarter of 2005, both NHG and Liuhe had decided on their first target of achieving the highest combined feed output in China in 2005, projected at six million tonnes. At the same time, there are plans to slaughter and process over 200 million poultry annually, and to expand NHG's presence in the livestock, dairy and meat processing industries. 

 

Grounds for collaboration

 

Post-merger, the most immediate step was to restructure an entire value-chain that starts with feed and ends at meat processing. The consensus to move away from livestock breeding and reproduction appeared timely, given the highly volatile and capital intensive nature of an industry fraught with technology challenges and risks. Domestic livestock breeding still lags behind international standards in terms of expertise and quality of breed stocks produced, which has curtailed the development of downstream and upstream industries. The NHG-Liuhe collaboration will help steer their joint-operations clear of such market risks, both parties affirmed.

 

What might prove daunting for NHG-Liuhe is moving ahead together based on a consensual corporate ideal. Yu Kai, head of research at Zhiduoyin, a Shenzhen-based research company, says that the restructuring of company staff and corporate culture, and brand integration post-merger might be the biggest challenge yet for the partnership. Moreover, both have corporate bases that are geographically apart, which may complicate integration efforts in the future.

 

As broader plans were uncovered, it was clear the considerable net benefit to be gained. Both premium brands could widen their respective domestic market shares through mutually marketing each other's product in their respective northern and southern regions. Shifting the focus towards animal feed and having a common aim of extending their individual reaches into the global feed market will also drive the alliance to pool their resources in areas of procurement, marketing, scientific research, training and business development. 

 

It is not just about enlarging individual corporations, stresses Liu. China's feed industry lacks a voice in a global market dominated by multinationals that are able to direct global trade by influencing product prices and market trends. ¡°Without forming alliances, without a competitive edge, our feed industry would be swept easily away in a global marketplace dominated by high tonnage producers," says a normally reserved Liu to the press. "Operating risks will increase if we allow the fate of our domestic companies to be dictated by foreign multinationals. This Liuhe merger works to give us an edge over the cost competitiveness of MNCs, especially in the procurement of soy and soy products, and other core feed ingredients."

 


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