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Dairy firm buys Sanlu assets to fuel growth

BEIJING Sanyuan Foods Co Ltd won the bidding yesterday for the core assets of the bankrupt Sanlu Group Co - the company at the center of China's milk powder scandal - with an offer of 616.5 million yuan (US$90.1 million).

The Beijing-based dairy maker will acquire Sanlu's land use rights, buildings, machinery and equipment as well as one of its subsidiaries, the Linhe Dairy.

Sanyuan won the assets for a price that was well below earlier estimates of 800 million yuan to 1 billion yuan, beating out a single unidentified rival. The auction was held in north China's Hebei Province at the Intermediate People's Court of Shijiazhuang, where Sanlu was headquartered.

Most of China's leading dairy makers, including Inner Mongolia-based Mengniu Dairy Co and Yili Industrial Group Co, could not take part in the bidding as it was open only to firms not implicated in the melamine scandal.

Playing down market concern that the purchase of the discredited firm might hurt Sanyuan's reputation and short-term profit, Sanyuan Chairman Zhang Fuping said the acquisition will help improve the company's product structure and boost capacity for expansion.

Sanlu had been China's leading seller of milk powder for 15 years until its products were found to be tainted with melamine last September.

The industrial chemical, used to mimic protein in diluted milk, has been linked to the deaths of at least six infants and kidney stones and urinary tract problems in nearly 300,000 others in the country.

Sanlu was declared bankrupt in February after being unable to pay its debts. Twenty-one other dairy makers, including Mengniu and Yili, were also caught selling contaminated milk powder.

Analysts said they expect asset acquisition to boost Sanyuan's competitiveness in a struggling industry.

"Sanyuan has picked up the assets at a low price, and the deal will enable it to gain stronger control over raw milk," said Wang Peng, a dairy analyst at Shenyin and Wanguo Securities Co Ltd.

Wang said raw milk from Beijing, Tianjin and Hebei Province, areas where Sanlu previously was the market leader, accounts for 17 percent of the nation's total supply.

"But it remains uncertain whether Sanyuan has sufficient management experience to deal with such considerable assets," he said.

Though the purchase helps Sanyuan narrow the gap against Mengniu and Yili, the smaller firm has a long way to go before challenging the bigger players, which each have revenue exceeding 20 billion yuan a year, said Huang Mao, a Gosen Securities Co analyst.

Sanlu Group's revenue reached 10 billion yuan in 2007, while Sanyuan's was only 1 billion yuan.

Sanyuan estimated that it would recover 30 percent of Sanlu's annual sales revenue this year and the Sanlu assets would start contributing to profits in 2010.


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