Beijing Sanyuan Food Co Ltd (Sanyuan) yesterday successfully won the bidding for part of the assets of Hebei Sanlu as expected at an auction price of 616.50 million yuan, the largest case of its kind in China's dairy industry. This marks a substantial step forward in the company's five-month long preparation for the acquisition deal.

The transaction is expected to send a signal of confidence to the badly-hurt Chinese dairy industry whose sales have fallen to historic lows since the melamine scandal broke in September. It will also help the regional dairy producer grow into a national brand by leveraging Sanlu's sales and marketing network.

The asset bidding auction was held yesterday in the Intermediate People's Court of Shijiazhuang and three companies were in the fray. The assets that Sanyuan successfully bid for include Sanlu's fixed assets like land, factories and machines and the rights for a subsidiary company in Xinxiang, in Central China's Henan province.

Sanyuan said its parent company Sanyuan Group and its subsidiary Hebei Sanyuan will later bid for Sanlu's two subsidiaries in Shijiazhuang and Tangshan, both in Hebei province.

Before the deal, Sanyuan had rented six factories of Sanlu. The Sanlu brand and logo will no longer be used.

Sanyuan has also promised that it would not retrench the 3,070 Sanlu employees.

Sanyuan shares were suspended from trading yesterday. It had risen to 6.66 yuan per share on Tuesday from 6.15 yuan per share on Feb 16.

Sanyuan had emerged as the front-runner for the assets. In mid-February, it said it would raise funds ranging from 800 million yuan to 1 billion yuan by selling shares to Sanyuan Group and Hebei Sanyuan, at 4 yuan per share to fund the asset buy. Sanlu's total assets were valued at 1.56 billion yuan before its bankruptcy, 2.53 times Sanyuan's final bidding price.

"This year is critical for Sanyuan. It's a year to grow bigger and stronger," according to a company statement.

With the brands of the top two dairy producers including Mengniu and Yili tarnished by the melamine scandal, it is now high time that Sanlu enhanced its competitiveness and recouped consumer confidence.

The way ahead is still tough for Sanyuan as it faces problems in pooling funds, corporate integration, dismal market, milk source quality control and fierce competition.

"Sanyuan will need more money, and would try to raise funds through share sales to investors," said Fan Xueshan, executive director, Sanyuan.

(China Daily March 5, 2009)