China Agriculture Investment Bimonthly Report is the 7th newsletter that CCM launched two months ago, indicating that M&A in China's feed industry will continue in the near future.
In February 2011, the leading feed enterprise in the world Nutreco Group purchased 100% shares of Zhuhai Shihai Feed Co., Ltd. (Zhuhai Shihai) - a leading aquaculture feed company in China - at a fancy price, attracting much attention in feed industry. Some other M&A cases also happened during 2010-2011. It's estimated that this M&A trend will continue in China's feed industry.
Currently, China is the second largest feed production country in the world. And feed industry plays an important role in the development of national economy. Through the M&A wave during 2005-2007, the number of small feed enterprises declined apparently. In 2007, there were 15,400 feed enterprises in the whole nation, but the figure reduced to 13,600 in 2008—almost 2,000 feed enterprises disappeared.
The number of feed enterprises in China will decline continuously in the future. And it will reduce the cost of M&A for large feed enterprises. Thus, it's a great time for the expansion of large enterprises and the integration in feed industry.
Besides the current situation of feed industry in China, some of government regulations are favorable to large feed enterprises' expansion. Measures for the Examination of Feed Production Enterprises, issued on 1 May 2007 by the Ministry of Agriculture, emphasizes and standardizes the feed production to protect the product quality. The regulation puts some pressure on feed enterprises; unqualified enterprises have to withdraw from the market. Small feed enterprises are on a sticky wicket due to lack of sufficient funds to meet the requirements, while the raised threshold is beneficial for large feed enterprises.
Moreover, feed industry's development depends on the development of breeding industry. In breeding industry, small-scale enterprises and farmers are gradually quitting due to the high production cost, while largescale breeding enterprises are forming, which will further intensify in the coming few years. At the same time, the strong demand for meat, eggs, and dairy products will drive the expansion of breeding industry. All these are beneficial for large feed enterprises to develop and enlarge scale.
Because the feed industry is easily impacted by market fluctuation and meager profit, feed enterprises have to extend industrial chain to reduce the risk. Thus, feed enterprises would choose to acquire some breeding enterprises.
However, there is a strange situation in China's feed industry. It's reported that some foreign-owned enterprises attempted to enter the breeding industry through investing in feed industry, because it's difficult for them to pass the certification auditing in breeding industry under the protection of Chinese government.
Amidst M&A cases in China's feed industry, it's not difficult to see that foreign-owned enterprises' direct acquisition of domestic enterprises is rare: only three cases during 2005-2011. High acquisition costs but low profit are the reasons. It's estimated that foreign-owned enterprises will take over some large feed enterprises when China's feed industry develops to a better stage. But joint investment together with domestic feed enterprises in feed industry is a common cooperation method.
Therefore, M&A will still happen among domestic feed enterprises. And the M&A will continue in domestic feed industry in the future to further promote the industrial integration.
For more information about China Agriculture Investment Bimonthly Report, please feel free to contact us at econtact@cnchemicals.com.
(Guangzhou China, September 11, 2011)
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