Infant formula manufacturer Bellamy’s has defended due diligence on the acquisition of the Camperdown Powder’s Braeside factory, which has had its export licence suspended by Chinese authorities.
Bellamy’s paid $28.5 million for a 90 per cent stake in Camperdown Powder, to gain CNCA licences, which it needed to secure regulatory approvals for products sold in to China.
The Department of Agriculture and Water Resources (DAWR) has confirmed the factory was not among Australian facilities, audited by Chinese authorities, in May.
“The Certification Accreditation Administration of the People’s Republic of China (CNCA) were in Australia (May 15-25) to audit dairy establishments, seeking approval to export to China,” a DAWR spokesman said.
“Camperdown Powder was audited for approval by CNCA in 2015 and have been operating without incident since that time.”
The spokesman said the DAWR had no issues with the factory.
In a statement to the Australian Securities Exchange (ASX), Bellamy’s said the CNCA had made inquiries and requested certain information of Camperdown and the Federal government.
“Bellamy’s understands that the inquiries raised by the CNCA were as a result of allegations, received by the CNCA from a third-party complainant relating to historical filing and records and to certain quality issues relating to Camperdown’s processing facility,” the statement said.
Camperdown Powder was set up by Camperdown Dairy International (CDI), which blended and canned milk powder products.
CDI went into administration two days after it sold the factory. It is believed former CDI director Gavin Evans would stay on at the Braeside plant.
In response to a question on whether or not the sale contract had contained a clause that the factory was “fit for purpose” the Bellamy’s spokesman said:
“The Company was diligent in its due diligence and negotiation processes,” he said.
“The details of the acquisition documentation are confidential.”
He said the complaint to the CNCA was made after ‘due diligence” was completed and the deal concluded.
Bellamy’s said none of the CNCA’s inquiries related to micro-biological or contamination issues or Camperdown’s recent change of ownership.
Camperdown Dairy International (CDI) was established in 2014, by EAT Group and their investment partner, as an integrated dairy processor focusing on premium infant formula production.
CDI was one of only eight companies in Australia to successfully gain a Chinese infant formula manufacturing export licence.
In its statement to the ASX, Bellamy’s said it did not intend processing products at the Braeside factory until 2018.
“Until then, the company will continue to rely on third party manufacturers to manufacture its ‘Chinese label’ product, into China,” the statement said.
It was continuing work to upgrade the factory, which it hoped to reopen in late August.
“We are working closely with Australian trade officials to respond to CNCA’s inquiries,” Bellamy’s chief executive Andrew Cohen said.
The suspension came at a time when dairy analysts warned of the risks involved in the China market.
Rabobank senior dairy analyst Michael Harvey said the suspension was a reminder to processors they needed to “derisk themselves” from China.
While China remained Australia’s largest market, with good growth rates, processors needed to avoid underinvesting in other countries.
“It is a timely reminder and reinforces that view, that while you are never going to replace China, given the importance and size of the market, you need to look at other options, as well.”
The way the suspension was announced “blindsided” everyone.
“It highlights the risk for infant formula companies at the moment,” he said.
But he said the biggest issue was how new import regulations, to be introduced later this year, would play out.
“That’s the big risk – how it’s going to be introduced and implemented,” Mr Harvey said.
He said the new regulations, which would limit the number of products which could be sold in China, would see considerable shrinkage of brands.
“We are still waiting to see who will be successful and who won’t,” he said.
“There are going to be some casualties in terms of the number of brands operating in the market place and the number of factories which can service the market.”
And Rabobank's senior Shanghai-based dairy and beverage analyst Sandy Chen said the complex, regulatory changes in the Chinese market were a challenge.
“From time to time, these can be very disruptive to the market, but I think we will see a lot of opportunities,” Mr Chen said.
“I think the key message is around reasonable diversification, not to over invest in China, but also not to under invest in other Asian markets, particularly south-east Asia, which presents a good growth outlook.
“It is also extremely important to stay on top of the regulatory changes, and also being able to adapt to them quickly.”