Beingmate's disappointing financial results could trigger acquisition move

Chinese infant formula producer and distributor Beingmate Baby & Child Food's disappointing financial reports with numbers far worse than originally forecast could trigger a possible acquisition by New Zealand-based Fonterra Cooperative Group, according to industry experts.

On Jan 22, Beingmate's shares last traded at 6.03 yuan (94 cents), down from 14 yuan last May.

Beingmate's market value has dropped to 6.17 billion yuan. The company's statement reported a 2017 net loss of 800 million to 1 billion yuan. In the third quarter fiscal report of last year, it estimated the loss would be 350 million to 500 million yuan. In 2016, Beingmate's loss was 781 million yuan.

Beingmate, which distributes infant formula and baby food throughout China, sells Fonterra's Anmum product through a joint venture.

An industry expert who didn't want to be named said Beingmate's loss might not be as big as reported. The insider said the financial result might lead to the possible acquisition of additional Beingmate shares by Fonterra, which already owns 18.8 percent of the Chinese infant formula company. By doing so, Fonterra can produce and distribute its own infant formula brands at lower costs, said the insider.

Fonterra declined to comment on the possible acquisition of Beingmate but issued a statement earlier on Monday.

"As an investor in Beingmate, we are extremely disappointed by this announcement and the ongoing performance of the company," according to Fonterra's statement released on Monday.

"We are seeking more information on the forecast downgrade, in addition to receiving Beingmate's full year financial statements. We will consider the financial implications on our investment for the purposes of our upcoming interim financial results."

The statement said they are also aware that four Beingmate directors, including the two directors designated by Fonterra, have expressed reservations relating to some aspects of Beingmate's financial management and reporting practices.

"Despite Beingmate's recent performance, the strategic rationale for our broader partnership with Beingmate still stands. We are disappointed that Beingmate is not maximizing the opportunity created by the early registration of its 51 formulations under the new registration rules," the statement said.

"The Chinese market is growing rapidly and within five years, forecast demand for infant and baby dairy products will be more than the total for other global markets, so the potential remains."

China is one of Fonterra's largest global markets, accounting for NZ$3.4 billion ($2.47 billion) of Fonterra's sales revenue and a normalized earnings contribution of greater than NZ$200 million in fiscal year 2017. Its business in China includes ingredients, food services, farms and the partnership with Beingmate.

Last year, the infant milk formula market in China reached 118.9 billion yuan and has been forecast to exceed 170 billion yuan by 2021, according to Euromonitor International.