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China Disposal

6 June 2021

On 5 June 2021, Reckitt Benckiser, UK-based consumer goods company, announced it would sell its baby formula unit in China to Primavera, the private equity firm founded by Fred Hu, the previous Goldman Sachs Greater China CEO. The deal is valued at $2.2BN, involving $1.3BN in cash, as well retaining 8% stake in the unit. Reckitt in 2017 bought US baby milk group Mead Johnson in a £13BN deal. However, it faced fierce competition in the Chinese baby food market, partially from domestic competitors and other imported brands from Australia and New Zealand. Reckitt’s whole baby formula division sales declined 7.4% in the first quarter of 2021, compared to the previous year. Through this deal, Primavera will take over Reckitt’s manufacturing facilities in the city of Nijmegen, the Netherlands and the city of Guangzhou in China. In Guangzhou its production plant employs 3,000 people and generated revenues of over £800 M in 2020. Whether your strategic move pay off largely depends on your local partner. Primavera has previously invested in Alibaba, and ByteDance (TikTok).

From the other direction on Chinese company’s overseas acquisition, it is not an easy undertaking neither. Bright Food, one of China’s largest food groups, bought 60% of Weetabix, the British Food company in November 2012 with an enterprise valuation of £1.2BN. Ideally, this overseas acquisition can accelerate Bright Food’s global expansion while tapping into the growing Chinese cereal market – currently enjoying a 20% growth rate. Also, Weetabix in theory can access all Bright Food’s distribution channels, including over 100,000 retail outlets. However, just less than 5 years before, in April 2017, Weetabix was sold to Post Holdings, the third biggest player in the US cereal market for $1.8BN (£1.4BN). Arguably, the Chinese consumers’ appetite for cereal needed more time to take off. But the other important challenge is the acquisition management team did not meet the expectations placed on them. Likewise, either entering the Chinese market or growing the Chinese market is not easy. It needs much more than the grand strategy – it needs an execution plan. In the long run, the Chinese market will grow with the rising middle-class and the dual circulation strategy dominated by domestic circulation (https://www.youtube.com/watch?v=BKPEBLYQFSE), but the competition in China will become tougher and tougher. So, it’s better to be prepared well, and in advance.

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