Sharply lower valuation follows 3 hard years for Israel’s biggest food maker under control of China’s Bright Food

Three years after it sold a controlling stake in Tnuva, together with the Apax Partners private equity fund, the Israeli holding company Mivtach Shamir is in preliminary talks to buy Tnuva back at half the price, sources have told TheMarker.

They said the discussions until recently had been frustrated by the refusal of the Chinese purchaser, Bright Food, to accept a valuation for Tnuva, Israel’s biggest food company, that would be just 50%, or even less, of the 8.6 billion shekel valuation ($2.36 billion at current exchange rates) at which it bought the company in March 2015.

 

In response to TheMarker’s report, Mivtach Shamir told the Tel Aviv Stock Exchange on Sunday: “Since the sale of Tnuva in 2015, [we] have approached Bright Food on several occasions to examine its readiness to sell back the shares. Bright Food responded that it wasn’t interested in selling and to the best of our knowledge, that remains the situation today.”

Sources told TheMarker, however, that Bright Food’s attitude may have changed recently. Shares of Mivtach Shamir, which is controlled by Meir Shamir, ended up 1.5% at 69.12 shekels on Sunday.

Lu Yongjie, who was Bright’s chairman when the Tnuva deal was done, left at the end of 2015 and in May of this year, the ruling Communist Party’s anti-corruption watchdog said he was being invested over suspected graft. New management can more easily write off the loss on the Tnuva deal because the debacle wasn’t its fault.

An indication of a changing attitude on Bright Food’s part came last March when the Chinese company replaced the directors representing it on the Tnuva board with executives from Bright Food International, the company’s global investment arm. Previously they had been officials from Bright Dairy, the group’s dairy-operating unit.

Moreover, after going on a global shopping spree, Bright Food has more recently shown a willingness to divest businesses, including the $1.8 billion sale of the UK breakfast cereal maker Weetabix last year to the American company Post Holdings.

Hailed at the time as a sign of burgeoning Israeli-Chinese business ties, the Tnuva acquisition has turned into a huge embarrassment for Bright Food. When Apax and Mivtach Shamir reached the deal to sell their 76.7% stake in the company, Tnuva was generating earnings before interest, taxes depreciation and amortization of 800 million shekels a year, but there were already storm clouds on the horizon for Israel’s dominant maker of dairy products. It had been a rise in the price of Tnuva’s cottage cheese that had sparked the 2011 social-justice protests and the government had become determined to lower the cost of food.

 

Tnuva was hit by new rules opening the market for hard yellow cheese to imports while a decision by Super-Sol, Israel’s biggest supermarket chain, to sell private label dairy products, cut into its market share as did heightened competition from the Strauss Group, the No. 2 dairy. More recently, Finance Minister Moshe Kahlon has refused to allow the cost to the consumer of price-controlled dairy products to rise in tandem with the rising price of raw milk. After the government last week approved another hike in milk prices, this time to 8.23 agorot a liter, Tnuva CEO Eyal Malis told employees that Kahlon’s increases had so far cost the company 150 million shekels a year.

As a closely held company, Tnuva doesn’t publish its financial results, but a leaked first-quarter 2017 financial report showed that EBITDA for its core dairy division had fallen 14% to 92 million shekels. Last August, data from the market research firm Storenext showed that Tnuva’s share of Israel’s dairy market had slipped below 50% for the first time ever.

Meanwhile, Bright Food’s Israeli partners in Tnuva – a group of kibbutz purchasing organizations – have expressed strong displeasure with how the Chinese company has been running the iconic Israeli dairy firm. They have said that management has been too passive in the face of stiffer regulation and competitive challenges, while zigzagging between focusing on market share and profits. And Bright Food’s promise to take Tnuva into the budding Chinese market for dairy products hasn’t been fulfilled.

Mivtach Shamir, which has a market capitalization of just 658 million shekels, won’t be able to buy back the controlling stake in Tnuva on its own, sources said. However, it is hoping that the disgruntled kibbutz purchasing organizations will join it in the acquisition.