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China’s appetite for buying international food producers has grown at a record pace so far this year, reflecting growing middle-class hunger for a more affluent diet in the world’s second-biggest economy.
Outbound mergers and acquisitions in the food and beverage industries accounted for 17 percent of total M&A in China in the year to date, almost on a par with the 20 percent from the energy and power sector – traditionally the biggest deal generator, according to Thomson Reuters.
The targets include Hollick, the Australian winemaker, and Tnuva, the Israeli cheese and consumer foods supplier, as well as the trading arms of companies involved in the pricing and flow of agricultural raw materials around the world.
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The shopping spree comes a year after U.S. pork producer Smithfield Foods was gobbled up by Shuanghui International, now known as WH Group, in a $7 billion deal that remains the largest ever outbound acquisition by a Chinese company, according to Thomson Reuters.
Zhizhong Yang, chairman and chief executive of Nomura China, says: “There is an upward trend in China’s overseas investment in the consumer sector which will grow at a much faster rate than its investment in other sectors – including natural resources.”
The reason for the wave of dealmaking is China’s transition from an export-led economy hungry for energy, natural resources and infrastructure into one driven by a surging consumer class.
In a special report on changing food consumption patterns in China published on Friday, the World Bank said that the country’s rapid growth over the past three decades had “vastly improved diets”.
Each person is eating on average 40 percent more calories a day than in 1980 with a “shift to a more ‘affluent’ diet” – away from basic staples to livestock-based products, such as meat and dairy.
“Over the next two decades per capita food consumption will continue to grow rapidly, with somewhat faster growth during the coming decade, driven by income growth,” according to the World Bank.
Growing wealth is also leading to demand for better quality and safe, reliably-produced food – which some western brands are perceived as offering – after several scandals involving tainted food, including baby formula.
Wan Long, chairman of WH Group, cited “Smithfield’s leading production and safety protocols to provide safe, high-quality products”, and its higher-margin pork products – such as ham and sausages, increasingly favored by Chinese consumers – as key attractions of the U.S. company during the takeover.
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Nomura’s Mr Yang says: “As China’s middle class becomes richer, their taste for goods and services will become more sophisticated. Local supply is not sufficient, so they have to look outside of China. Food security and safety has been a pivotal issue for China. With abundant capital, China would rather buy than simply import.”
Many Chinese acquirers are national state-owned bodies, such as grain trader Cofco, which recently spent $1.5 billion on a stake in a sugar, soyabean and wheat joint venture with Noble Group, the Singapore-based commodity group.
A second group of buyers belong to local governments. These include Bright Food, owned by the Shanghai municipal government, which has already bought Weetabix, the UK breakfast brand, and last month paid just under $1 billion for a controlling stake in Tnuva.
Private sector groups such as WH Group have also become active, but their overseas shopping lists are selective.
“Chinese companies are looking for opportunities which make the most strategic sense,” says Camillo Greco, head of M&A advisory for Europe, the Middle East and Africa at JPMorgan. “We see them acquiring businesses for technology and competencies they don’t have or for a brand that they can develop in China.”
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Bright Food has said that one of its target areas is modern agriculture – one reason for its interest in Tnuva. It has also said it is looking for dairy, sugar and sweeteners and spirits and wine.
More from the Financial Times:
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Lacking the expertise to manage companies, bankers say that Chinese buyers are also becoming more comfortable with keeping existing management in place.
Florian Fautz, global head of M&A at HSBC, says: “They are also going into situations where they acquire minority positions. They are not necessarily just looking for 100 percent stakes any more.”
But for even greater outbound investment to take off more needs to be done at a policy level to integrate China into the global economy.
Mr Fautz says: “Europe continues to drive a lot of interest and there are strong economic ties between China and EU, which is its largest trade partner in the developed world. A bilateral investment treaty would make investment flows much easier.”