Wahaha eyes snacks business

Chinese food company, five others in race to buy United Biscuits' unit in britain

Chinese food and beverage giant Hangzhou Wahaha Group Co Ltd has emerged as one of the contenders for KP Snacks, the snacks business of Britain's United Biscuits Topco Ltd.

The British company, which has under its umbrella popular snack brands such as McCoy's, Hula Hoops, KP Nuts and Skips, is being put up for sale by its private equity owners, Blackstone and PAI Partners, for 520 million pounds ($818 million, 656 million euros), according to a report by the British newspaper Sunday Telegraph on Aug 19.

According to experts, such moves typify the efforts being made by Chinese companies to acquire superior technologies and brands through overseas mergers and acquisitions.

If successful, Wahaha will get access to a huge portfolio of well-known Western snack brands and also to cutting-edge technology in the food business that will help it steal an edge over others.

It would also be the second acquisition by a Chinese food company this year, after the Shanghai-based Bright Food Group Co acquired a 60 percent stake in British cereal maker Weetabix Ltd in May.

Weetabix's advanced technology systems proved attractive to Bright Food, whose chairman Wang Zongnan said Weetabix's "best-in-class production standards and excellent track record for innovation" should bring in long-term profits.

Bright Food's appreciation for expertise now seems to be shared by Wahaha, which signed a five-year joint research project agreement with the University of Nottingham earlier this month.

"We observe that there is a 10-year gap between Chinese companies and their Western counterparts, not so much in terms of the technology, but what goes behind it - the production, product design and quality control," says Chris Rudd, a pro-vice chancellor of the University of Nottingham.

Researchers from the university will help Wahaha develop new products for China's increasingly health-conscious consumers and international consumers, as well as improve its quality-control processes through staff training.

"For China to catch up with the West, it needs people who recognize industry standards, processes, quality control, ingredients and sourcing," Rudd says.

"From my observations, Wahaha's production equipment is excellent. It's probably the best in China, and just as good as anyone in Asia. But the R&D (research and development) side is just starting to evolve."

Credit Suisse, the advisor for the KP Snacks deal, has already sent a four-page sales "teaser" to the six potential buyers, including Wahaha.

The teaser was also sent to US cereal maker Kellogg's Co, which recently paid $2.7 billion (2.15 billion euros) for crisp company Pringles, US food and beverage conglomerate Kraft, and a series of other private-equity firms, including Permira. The final Information Memorandum will be sent out on Sept 3. United Biscuits, Kellogg's, Kraft and Permira declined to comment.

Dan Qining, a spokesperson for Wahaha, has denied that the Chinese company is in negotiations with KP Snacks, but industry insiders believe this could be a strategy to keep the deal under wraps.

"Wahaha is not a listed company and has no obligation to disclose such information. It may have denied the talks to discourage excessive media coverage, which can affect the acquisition price," Liu Jiawei, chief food and drink analyst at Dongxing Securities Co, was quoted by the industrial website food.china.com as saying.

Bright Food had also denied that it was in talks with Weetabix back in April.

Founded by Zong Qinghou in 1987 as a small school-run business, Wahaha Group now has more than 30,000 employees and recorded sales of 67.9 billion yuan ($10.68 billion, 8.5 billion euros) last year.

Its branded products include milk drinks, soft drinks, bottled water, bottled tea, fruit juice, porridge and yogurt beverages.

In a move to expand globally, Wahaha established an import and export arm in 2010, through which it has bought food ingredients and equipment from Western companies, including New Zealand dairy firm Fonterra Co-operative Co, Brazilian orange juice concentrate producer Citrovita, and German packaging and bottling machine manufacturer Krones AG.

Some of Wahaha's products, including bottled water and milk drinks, are also sold in more than 30 foreign markets, including the US, Singapore, Italy and South Africa, generating an annual revenue of about $20 million.

Rudd says that acquiring KP Snacks could help Wahaha become more international.

"It's not just about acquiring a new product range, but also the people, the brands, the distribution mechanism, and a platform to bring Chinese brands and products to a Western market," he says.

Although Wahaha's product portfolio consists mainly of drinks, Rudd believes Wahaha can also use KP Snacks' food technologies to improve its drinks products.

"The food and drinks industry is a continuum - product design, process technology reads across both markets. Also, many intermediate products exist based on emulsions and suspensions, like yogurt and congee soups, and many technologies can be transferred," Rudd says.

Marcia Mogelonsky, a food and drink analyst at London-based research company Mintel Group Ltd, says that Chinese companies can learn "best practices" through acquisitions.

"There are many companies in the West that have processes to guarantee the safety of food processing from start to finish. Chinese companies would benefit by seeking out Western companies with high-quality traceable food safety systems," Mogelonsky says.

She says another reason why Wahaha may be interested in KP Snacks is due to the fact that it would "give Wahaha Western products to sell to urbanized Chinese, who are interested in Western snacks".

Bright Food's subsidiary Bright Dairy acquired a 51 percent stake in New Zealand dairy firm Synlait Milk Ltd in 2010 to introduce a new product to Chinese consumers under its own brand name.

The two parties worked together to develop Pure Canterbury, a premium infant formula brand for the Chinese market, which reached the shelves of Chinese supermarkets last year.

"Bright Dairy and Synlait Milk had highly complementary aspirations," says John Penno, CEO of Synlait. "Bright Dairy wanted to develop a premium infant formula brand and we wanted to expand into the infant formula market in China."

However, Penno did not believe that Bright Dairy could learn from Synlait's technologies, as Bright Dairy already had advanced equipment and production expertise.

"Also, the dairy sector is different from many other food sectors because the quality of the product depends on the raw milk, and New Zealand has the top-quality milk," he says.

Meanwhile, Bright Food is pursuing attempts at other overseas acquisitions.

It bought a 75 percent stake in Australian food producer and importer Manassen Foods. It missed French yogurt maker Yoplait and US vitamin retailer GNC and was defeated in the race to buy Australian sugar refiner Sucrogen.

But as analysts believe the Weetabix deal, which valued Weetabix at 1.2 billion pounds, is the largest overseas acquisition by a Chinese company in the food and beverage sector, a new trend is gaining momentum.

And Bright Food's strategy of "buying famous international brands and developing advanced technology" is certainly a part of this trend.

Last year, Weetabix migrated its procurement systems to a cloud-computing environment to improve control, visibility and compliance of its supply chain.

It also improved its warehouse management in recent years, using new software that takes data from radio-frequency identification tags to track goods. Stock tracking and picking errors were cut from 10 percent to 0.1 percent.

"In China, you have to set an example, and then others will follow. What Bright Food has done will definitely set a trend for other Chinese food companies the way we have seen in the automotive industry," Ghislain de Mareuil, a Paris-based lawyer at De Pardieu Brocas Maffei, told Reuters in May.

In the automotive industry, Shanghai Automotive Industry Corp's acquisition of MG Rover Group in 2005 was followed by Zhejiang Geely Holding Group Co's acquisition of Sweden's Volvo in 2010.

De Mareuil's comments are echoed by Rudd, who believes this trend is "an important one", as it would help Chinese companies acquire a more international culture.

"Chinese companies are catching up - they are ambitious and impatient, and they are trying to achieve a step change through acquisitions," he says.

"From my observations, for a successful company like Wahaha, assimilation would take place quickly, as there is a strong direction from the company's leadership."

cecily.liu@chinadaily.com.cn