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Lactose intolerance

19 June 2013 By John Foley

Small shareholders in Chinese companies have a new reason to be whey-faced. Big investors in Hong Kong-listed Yashili have agreed to sell out to Chinese dairy giant Mengniu for HK$3.50 a share – a fifth below the price at which the milk powder maker floated just three years ago.

Yashili’s short history as a listed company has been stomach-churning. The shares fell 12 percent on their first day of trading in November 2010. A year later, they were 70 percent below their debut price. For the founding Zhang family, going private and receiving over $660 million in cash in return for selling its 51 percent stake must seem attractive. The clan will also retain ten percent of Yashili’s equity via an unlisted vehicle, and is likely to retain key management positions.

Yashili’s financial backers have also done better than they might have expected a year ago. Buyout firm Carlyle has roughly doubled the value of its investment by selling its 24 percent stake for cash, according to people familiar with the situation. Even UBS, the bank that underwrote Yashili’s IPO, gets a second sip as lead advisor to Mengniu.

There’s little cream for minority investors, however. The offer values Yashili stock at just five percent above where it traded at the end of May, after stripping out the dividend due to be paid at the end of June. The offer values Yashili at around 15 times this year’s forecast earnings, compared with 25 times for food companies like Want Want and Tingyi, and 22 times for Mengniu itself.

Small shareholders aren’t entirely powerless. They could refuse to sell, or opt to receive a fifth of the offer in the form of shares in the unlisted holding company. But either scenario would leave them holding illiquid equity. The unlisted stock isn’t tradeable, and most institutions would be unable to accept it anyway. In reality, they have little choice but to sell.

Companies like Yashili, whose founders hold majority stakes, are the norm in China. For those who ride their coat-tails, that usually means handing control to someone whose interests aren’t always aligned with other investors. That lesson seems to repeatedly go unlearned.


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