(Bloomberg) -- China Mengniu Dairy Co. scrapped its plans to buy Kirin Holdings Co.’s Australian beverage unit after being told the deal would likely be blocked, amid increasingly strained relations between Canberra and Beijing.
Australia’s Treasurer Josh Frydenberg said in a statement he’d informed the Chinese dairy giant he’d reached a preliminary view that the proposed purchase “would be contrary to the national interest.”
The companies reached a deal last year for the Chinese firm to buy Kirin’s Lion Dairy & Drinks business for about 45.6 billion yen ($430 million). The companies said in separate statements Tuesday that they were ending the agreement as it hadn’t received regulatory approval.
Strained Ties
The scrapped deal is being viewed in local media through the prism of strained diplomatic ties between Australia and China. Relations between the two countries have been fraught since the government in Canberra barred Huawei Technologies Co. from participating in Australia’s 5G network. China also responded angrily after Australia’s push for an independent inquiry into the origins of the Covid-19 outbreak.
China has started an anti-dumping investigation into Australian wine, halted some beef imports and placed tariffs on Australia’s barley exports after the conclusion of an earlier anti-dumping probe. It has also cautioned its citizens against studying in or holidaying in Australia.
“It was probably politically untenable for Frydenberg to approve a deal of this size at a time when China is sanctioning Australia on multiple fronts,” said Richard McGregor, a senior fellow at Sydney-based think tank the Lowy Institute. “It’s another spin in the cycle downwards in these nations’ relations.”
The collapse of the Kirin deal shows a reversal of sentiment from a year ago, when Mengniu won approval to buy organic infant formula maker Bellamy’s Australia Ltd. for A$1.5 billion ($1.1 billion). The Australian Competition & Consumer Commission said in February that it wasn’t opposed to the Kirin deal.
Australia announced on March 29 that due to the national security impacts of the coronavirus pandemic it would tighten restrictions on foreign takeovers, with all deals needing government approval, regardless of size. Covid-19 has dealt a heavy blow to Australia’s economy and unemployment.
On June 5, Scott Morrison’s government announced it would seek to implement permanent tougher screening measures on foreign investors seeking to buy sensitive assets from Jan. 1. Yet to be legislated, the changes would see telecommunications, energy, technology and defense-manufacturing companies be included in the zero-dollar threshold for screening.
Tougher Screening
The changes will include a new national security test and give the treasurer last-resort powers to force asset sales.
Australia isn’t alone in ramping up its foreign investment screening -- in recent years, economies including the U.S., Japan and the European Union have toughened their own laws to protect national security.
Mengniu said it was disappointed the transaction could not be completed, as the Lion business created potential to build up its dairy supply chain in Oceania and Southeast Asia. The company’s shares fell as much as 2.2% in Hong Kong trading Tuesday.
“Mengniu has a stable dairy supply chain in Australia and New Zealand, and will continue to pursue its international strategy and take advantage of the existing resources in both domestic and international markets,” the company said in a written statement to Bloomberg.
Mengniu has been eyeing overseas acquisitions as China’s appetite for milk grows with its middle class. At the same time, China has been seeking to boost the industry and restore confidence after a milk scandal in 2008 killed six children and poisoned 300,000 others.
The termination of the Lion deal will slow Mengniu’s push to go upmarket, said Bloomberg Intelligence analyst Kevin Kim.
“Geopolitical tension can drag on Chinese companies’ overseas M&A attempts, especially if the targets are based in countries where China faces political tension,” Kim said. “For overseas deals to be successful, the general opinion is very important, especially for critical sectors for the nation.”
Kirin shares slipped as much as 0.9% in Tokyo.
“Although this was an unfortunate outcome, we’ll continue to discuss the best potential scenario for Lion,” a Kirin spokesman said.
McGregor said the development “signals to China that any substantial investment in Australia will come under increased scrutiny and be seen in the context of the tensions in the bilateral relationship” -- resulting in a possible worsening of ties.
“China will probably see this as another example of Australia’s bad faith,” he said.
(Adds comments from treasurer, Mengniu and analyst beginning in second paragraph)
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