China's insatiable appetite for all things Australian has seen it snap up everything from natural resources and real estate to airlines, hospitals and dairy farms. Vitamins are now on the list, too.
Shanghai Pharmaceuticals announced on Thursday it was teaming up with Chinese private equity firm Primavera Capital to acquire Sydney-listed Vitaco Holdings for A$314 million ($238 million), just 10 months after the vitamins and health supplement maker made its debut on the Australian Stock Exchange.
The pharmaceutical company, part-owned by the Shanghai city government, will own 60% of Vitaco while Primavera will own 40%.
The deal underscores China's huge appetite not just for all things Australian but also for manufacturers of vitamins and dietary supplements in the wake of food contamination scandals at home. It also reflects the growing concern for health in a country where the population is aging rapidly.
When the deal is completed, China will own two of Australia's three biggest health supplement makers. Hong Kong-listed baby formula manufacturer Biostime International purchased a majority stake in Swisse Wellness for $992 million last year in the biggest-ever Chinese acquisition in Australia's healthcare industry.
News of the Chinese offer for Vitaco sent shares of Blackmores, Australia’s largest vitamins and health supplement maker by market value, up more than 3% by Thursday market close in Sydney.
Soaring demand
The market for vitamins and dietary supplements has been growing in China as the country's burgeoning middle class becomes increasingly concerned about food safety. In recent years, Chinese firms have been caught producing tainted infant formula that sickened thousands of children and distributing "gutter oil" made from waste products as cooking oil, as well as other toxic fake food items.
Partly as a consequence of such scandals, middle-income Chinese have become more open to splashing out on health-promoting food and health products, especially from overseas.
The market value of China’s nutrition and health food industry has been growing by approximately 20% annually since the industry was mentioned for the first time in the country’s 12th Five-year plan in 2010. As of the end of 2014, the total market value was Rmb102 billion ($15.4 billion), more than double the level in 2008, according to corporate advisory firm Dezan Shira & Associates.
M&A catalysts
Demand for Australian health products has surged since the signing of the China-Australia Free Trade Agreement in December last year, which allowed Australian suppliers to sell their products directly to Chinese consumers through e-commerce platforms such as Alibaba's Taobao and JD.com.
In addition, the gradual depreciation of the Australian dollar against the renminbi in the past few years has made their products more affordable compared with competing health products from the US.
Australian health supplement makers have been building ties with China in recent years. For example, Blackmores signed the Chinese ex-tennis pro Li Na as an ambassador last year, while Vitaco said earlier this year it has appointed a general manager based in Shanghai, underscoring the importance of the Chinese market to the firm.
Yet over the years Vitaco has lagged its peers in terms of China exposure, with China sales accounted for only 11% of total revenue last year. As such, the link-up with Shanghai Pharma could help expand its distribution network in China and diversify its sales portfolio, which is now very much Australia- and New Zealand-focused.
Terms
Shanghai Pharma and Primavera will pay A$2.25 in cash for every Vitaco share, a premium of 27.8% to Vitaco’s Wednesday close and 7.1% to Vitaco’s A$2.10 IPO price in September last year.
The offer values Vitaco at 14.7 times EV/pro forma ebitda, according to a joint statement from the buyers.
On a price-to-earnings basis, the offer represents about 24 times net profit on a rolling twelve-month basis, which is largely in line with Biostime’s offer for Swisse Wellness last year and Blackmores’ valuation at the current market price.
The takeover is being conducted via a scheme of arrangement, which means the buying consortium will need to secure approval from the holders of 75% of Vitaco’s shares.
Next Capital, Vitaco’s largest shareholder with a 15.3% interest, has declared it will vote in favour of the scheme but said it would review the decision in the event a competitive offer arises.
The transaction is subject to a number of regulatory approvals, including Australia’s Foreign Investment Review Board and Securities and Investments Commission, and New Zealand’s Overseas Investment Office.
According to the indicative timetable, Vitaco is scheduled to hold the scheme meeting in November with the long-stop date set on 31 March 2017, by which date the buyers must fulfil the pre-conditions for the takeover.
Macquarie is the financial advisor to Shanghai Pharma and Primavera, while JP Morgan and MinterEllison advise Vitaco.
Rising Aussie interest
Shanghai Pharma’s bid for Vitaco comes hot on the heels of other Chinese offers for Australian assets earlier this year.
Last month, Chinese state-owned conglomerate China Resources Group teamed up with Macquarie to acquire an interest of as much as 74% in Australian cancer therapy provider Genesis Care.
That came after Hong Kong-listed Luye Pharma Group completed an A$938 million acquisition of Australian private healthcare group Healthe Care in May.
Earlier in February, Chinese billionaire Lu Xianfeng offered to purchase Tasmanian Land Company, which owns some 17,800 hectares of dairy farms in Australia and New Zealand, for $200 million.
State-owned conglomerate HNA Group also purchased a 13% stake in Australia’s second-biggest airline, Virgin Australia, for $115 million earlier this year.
China’s private investment into Australia exceeded that of state-owned enterprises for the first time last year, indicating that the acquisition trend in Australia could be driven by profits rather than Beijing's national goals, according to a report jointly published in April by KPMG and the University of Sydney.
Other potential M&A targets in Australia that could be of Chinese interest include clinic operator Primary Health Care, agrochemical firm Nufarm and wine maker Treasury Wine Estates, Credit Suisse said in a report in May.
