Friday, 17 October 2008

Sanlu 'facing bankruptcy' after milk scandal

The Sanlu joint venture into which New Zealand dairy farmers have ploughed nearly $200 million in China may be wound up.

Dairy cooperative Fonterra has claimed it retains an estimated $62 million worth of its investment – written down $139 million last month – but the Shanghai Daily reported today Sanlu is "facing bankruptcy".

Industrial experts told the newspaper that it is unlikely a single company will be able to take over Sanlu as its debts total more than 700 million yuan (NZ$169 million) –not counting massive compensation claims.

Chinese newsagency Xinhua said yesterday that 5824 children were still receiving hospital treatment for kidney diseases caused by a milk contaminated with melamine, and six children were in serious condition.

Amid widespread dilution and adulturation of Chinese milk, infant formula produced by Sanlu contained the highest levels of an industrial chemical, melamine, at 2563 mg/kg or parts per million (ppm). Tainted samples were found among another 21 suppliers (other than Sanlu), but the concentrations ranged from only 0.09ppm to 619ppm.

Fonterra last month wrote down the book value of its investment in the Sanlu operation by 69 percent to reflect the cost of recalling product poisoned by melamine – added to diluted milk to make it appear to have a higher protein levels – and NZ farmers' anticipated loss of brand value in the company.

The Shanghai Daily reported that a meeting today of companies interested in taking over Sanlu may open the door for a joint purchase of Sanlu, but any acquisition won't proceed quickly.
No potential buyers have so far revealed concrete plans, possibly due to the heavy financial burdens to compensate victims who drank the melamine-tainted milk.

The domestic milk manufacturers who are interested in buying Sanlu's include Wahaha Group Co Ltd, Wondersun, Sanyuan Food Co and Heilongjiang-based Feihe Dairy, which is a wholly-owned subsidiary of New York-listed American Dairy Inc.

Inner Mongolia Yili Industrial Group Co, the nation's biggest dairy maker as well as another victim of the widespread milk scandal, also agreed to attend the meeting to discuss the future of Sanlu, according to Bloomberg News.

A marketing survey of Chinese milk consumers has shown that half of Sanlu's former customers say they will avoid the brand in future.

Fonterra chief executive Andrew Ferrier said last month the cooperative might be able to reconstruct Sanlu's assets and was not ruling out any changes at Sanlu that provided a "commercially viable" solution for Fonterra. But Fonterra has not replied to questions about how the latest moves affected the investment by NZ farmers.


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