The recently closed deal to purchase Israeli food and dairy cooperative Tnuva Group by Chinese state-owned conglomerate Bright Food (Group) Co. epitomizes recent trends of the growing Chinese economy and may serve as a portent of future developments in the Israel-China economic relationship.
The factors that attracted Bright Food, China’s second- largest food manufacturer by revenue after COFCO Corp., to buy a 77.7 percent stake in Tnuva, Israel’s largest food producer and a national icon, bear all the markings of the recent shopping spree by Chinese corporations, which have been snapping up foreign brands that carry prestige, especially in sectors like foods, consumer and retail, and recreation.
The ongoing coverage of the deal in the Chinese media since news of it first broke in September 2013 focused on Israeli strength in the dairy industry, the proverbial Israeli “super cow” that ranks first globally in milk production, and on the benefits of Tnuva’s products for Bright Food’s portfolio.
But there were also other reasons for the deal, alluded to in the media, highlighting the changes in the Chinese food industry and potentially signaling more deals ahead.
The Chinese media also focused on the opposition to deal in Israel, citing considerations such as food security.
The Rise of China Inc.
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Chinese corporations began acquiring overseas companies in earnest in the early 2000s, and the first cautious trickle became a veritable flood after the 2008 financial crisis created opportunities for picking up assets on the cheap. In the beginning Chinese companies faced a steep learning curve regarding the rules of overseas deal-making, leading to early setbacks and a backlash from the government and the public.
The first deals were led mostly by state-owned firms and focused on energy and minerals, mostly in developing economies and in resource-rich developed economies. As the Chinese economy grew and evolved in complexity, and as demand from consumers became more sophisticated, Chinese companies started targeting crisis-battered assets in the US and Europe in industries from technology to cars.
Today “China Inc.,” the world’s second-largest economy by nominal GDP and the holder of the largest foreign exchange reserves ($3.8 trillion), owns stakes in global assets ranging from foreign carmakers (e.g. Volvo) to wineries, from football clubs (Atletico Madrid) to Club Med, from hotels (Waldorf Astoria) to ham producers (Smithfield Foods Inc.).
Since joining the World Trade Organization (WTO ) in December 2001, Chinese overseas direct investment increased at an annual rate of 36.5%, reaching an accumulated total of $713 billion by July 2014. In 2014, outbound investment from China for the first time exceeded $100b., nearly matching (by some accounts even exceeding for the first time) foreign direct investment into China, and the trend of China becoming a net exporter of capital is likely to continue.
Tnuva’s Appeal to Bright Food
The Bright Food-Tnuva deal exemplifies the ambitions of Chinese corporations in the food industry and the push by the Chinese government to improve food safety in the face of increased consumer demand and scrutiny. Bright Food, trailing behind COFCO, another state-owned giant, since 2010 has been on a shopping spree for foreign food brands in what the Chinese media termed “borrowing foreign chickens to lay golden eggs.” (See Table 1 for a list of deals).
Bright Food’s senior executives have indicated they aim to raise the percentage of overseas business of the company’s total business to 25% from 15% over the coming years. The company’s previous chairman, Wang Zongnan, said in an interview in October 2013 that it wasn’t enough anymore for Chinese consumers to eat their fill – consumers now demand healthy and safe food, especially with high-end food products.
So on March 31, 2015, the largest acquisition in the history of Israel’s food industry, and the biggest dairy deal by a Chinese company, was completed – Bright Food acquired 56.7% of Tnuva shares from Apax Partners and another 21% from Mivtach Shamir Holdings Ltd. for a total holding of 77.7%, putting Tnuva’s market value at NIS 8.6b.
Bright Food executives promised to work together with Tnuva to promote growth on both sides in such areas as innovation, research, advanced technology and sales.
Bright Food spokesman Pan Jianjun said the deal creates synergies in areas such as research and development, marketing and sales, and Bright Food would like to learn from Tnuva’ agricultural know-how to improve its industry chain.
The Chinese media especially highlighted Israel’s agricultural prowess and its high-safety food industry standards as appealing to Bright Food.
“Tnuva is famed for cheese and the market potential for cheese in China is huge. If Bright Food can purchase Tnuva, it becomes the number one cheese brand in China,” Global Times quoted an executive from Bright Food as saying.
The Evolving Chinese Food Industry
The demand by a food company for healthy and safe food products seems like a natural one. But there’s more to the Bright Food-Tnuva deal than simply available financing and a penchant for cheese in China. In order to understand the true appeal of Tnuva to the Chinese one needs to realize the importance and the sensitivity of food security in China.
China has always been the world’s most populous nation. With a population of 1.35 billion people today, the number one challenge of Chinese rulers from antiquity until today has been to ensure sufficient food for the country.
In 2011 China became a net importer of rice, adding to food supply anxieties.
Furthermore, in 2008 a scandal rocked the dairy industry in China – at least six babies died and 50,000 were hospitalized after drinking formula tainted with the chemical melamine. Lacing baby formula with melamine was blamed in part on dairy processors’ practice of buying milk from small, independent dairy farmers.
As a result of the scandal, the Chinese government began to tighten food safety standards and to demand higher quality products from the dairies. Higher consumer scrutiny and awareness on the one hand, and increased demand for high-quality food products as a result of Chinese urbanization on the other, combined to push Chinese food companies to hunt for foreign brands with a cachet of safety and quality.
In view of the regulatory difficulty of importing ready food products into China, the ability to secure a stable and long-term supply of raw materials increased the appeal of Tnuva for a company like Bright Food. This was a deal made in (Chinese) heaven.
It is likely that Chinese companies will continue to seek investments in Israel, mostly in high technology areas.
One factor facilitating this is the rising importance of Chinese financial investors in the overall composition of outbound investment – in 2014, financial investors accounted for 22% of total outbound M&A value, twice as much as the average of previous five years, according to the Rhodium Group.
As for Tnuva, Bright Food will likely take it public overseas like it did with some of its other acquisitions in order to reduce financial leveraging and prove Chinese companies are like any other investor, focusing on creating value for shareholders and increasing revenue.
A Chinese company taking over Israel’s national food icon caused considerable and understandable consternation in Israel. Just like Chinese companies learned the rules of global M&A, so they will become more adept in assuaging concerns in Israel stemming from the influx of Chinese money.
The author is the founding director of The Chinese Media Center (CMC), at the School of Media Studies of The College of Management Academic Studies, Rishon LeZion, Israel.
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