Sunday, September 26, 2010

Blackstone Group: Chinese Milk & British Biscuits

WSJ Asia reported:

Shanghai-based Bright Food (Group) Co. is in exclusive talks about a possible purchase of British snacks and cookies maker United Biscuits (Holdings) Ltd., people familiar with the matter said Sunday.

One of the people said the acquisition, if it goes ahead, would be valued at more than £2 billion, or about $3 billion. United Biscuits' current owners, U.S. private equity-firm Blackstone Group LP and French private-equity firm PAI Partners, paid £1.6 billion for the company four years ago. Britain's Sunday Times reported the talks first.
This could be China putting its foreign currency holdings to work before they hyper-inflate.  Goldman Sachs and JP Morgan are advising Blackstone/PAI.  Did they identify operational synergies between Bright Foods and United Biscuit, which involve new markets or changing United Biscuits' suppliers?

Bright Food has a toxic track record, at least in their dairy division.  Bright's dairy group delivered melamine tainted milk to the public

Radio Free Asia reported on the toxic milk outbreak in September 2008.  It called mixing melamine with watered-down milk "a common practice," at least since April 2005.

Investigators found melamine in milk products from 22 dairies and manufacturers, the official Xinhua news agency said. The companies include the Megniu Group, Bright Dairy & Food and the Yili Industrial Group. At least a dozen countries in Asia and Africa have been affected by tainted Chinese exports, the Reuters news agency said.
Consider the reasons for manufacturers and their suppliers to substitute cheaper ingredients, as noted by a professor from Ohio State University.

"There is relentless pressure now to contain costs," he said. "You have unfettered competition and growing price pressures, and therefore the pressure to cut corners is always there, and you cut corners by using ingredients you're not supposed to."

Who supplied that pressure?  In the case of China, it was heavy handed corporate executives and free wheeling suppliers.  Chinese regulators kept the lid on problems as the Summer Olympics neared.  After the scandal broke, the Chinese government provided an interest subsidy to dairies, many of which sold out to private equity underwriters (PEU's) firms

PEU's supply similar pressure.  They're relentless in growing profits and flipping affiliates for multiples of their original investment.  The Carlyle Group invested in one Chinese toxic milk offender, Yashili Group. It's ready to cash in, while dancing around the melamine issue.

While Blackstone looks to monetize United Biscuits, what assurances will they give the public that cookies will remain safe?  Will our children look back to the time even milk and cookies required buyer beware?

Update 11-30-14:  PEU owners pulled £34 million from United Biscuit, for their greed and sheer pleasure.