Photo source: Visual China

Blue Whale financial reporter Xu Xiaochun

The battle for control of the sterile packaging leader was once again on the table. On May 9, Xinjufeng proposed a takeover plan for Fenmei Packaging. The next day, Fenmei Packaging's board of directors rejected the proposal to appoint a new director.

In 2023, Yili's supplier Xinjufeng “quietly” acquired 28.22% of Fenmei Packaging's shares. Fenmei's founding team showed great resistance and tried to block the acquisition by filing an antitrust investigation, but in the end, Xinjufeng became the largest shareholder as desired. After turning around, Fenmei brought in major customer Mengniu shares and occupied a seat on the board of directors through appointments. Since then, Xinju Feng has proposed the appointment of directors twice, but both have been rejected. Fenmei's founder team resolutely blocked Xinjufeng from reaching control of the company on the grounds that their main customers had competitive relationships.

Plans to acquire industry leaders for another HK$2.7 billion

On the evening of May 9, Jingfeng Holdings, a Hong Kong subsidiary of Xinjufeng, issued a voluntary comprehensive offer to all shareholders of Fenmei Packaging to acquire all issued shares of Fenmei Packaging in cash. As of the close of trading on May 9, Fenmei Packaging's stock price was HK$2.1 per share, and the offer price offered by Xinju Feng was HK$2.65 per share, with a premium of about 26.19%. On May 10, Fenmei Packaging surged 20.48%. The closing price was HK$2.53 per share, close to the proposed purchase price offered by Xinjufeng.

In 2003, Bi Hua founded Fenmei Packaging and was listed on the Hong Kong Stock Exchange in 2011. In contrast, Xinju Feng is a newcomer to the capital market. The company was founded in 2007 and only landed on the Shenzhen Stock Exchange GEM in August 2022. As of the end of 2023, Xinjufeng's net assets were about 2,226 billion yuan, and Fenmei Packaging's net assets were about 2,901 billion yuan, which is about 1.3 times that of Xinjufeng. As a result, Xinjufeng's entry into Fenmei Packaging was viewed by the market as a “snake-eating” takeover.

In the early days, the domestic aseptic packaging market was completely controlled by foreign brands, and the Swedish brand Tetra Pak once controlled more than 90% of the market. Xinjufeng mentioned in the prospectus that in 2019, the sales market share of sterile packaging suppliers in the domestic liquid milk market was 61.2%, the Swiss brand SIG accounted for 11.7%, Fenmei Packaging accounted for 13.6%, Xinjufeng accounted for about 9.2%, and the total share of other suppliers was 4.4%. Until now, this pattern has remained largely unchanged.

In contrast, Fenmei Packaging and foreign brands have richer product specifications and types, involving packaging and filling solution businesses such as filling machines, accessories, and technical services. For example, Fenmei Packaging relies on the “Fenmei” brand. The main products include “brick bags,” “diamond bags,” “metal bags,” etc., while the vast majority of Xinjufeng products are composed of “pillow bags.”

In recent years, with Fenmei Packaging's production capacity mainly supplying Mengniu, Xinju Feng, which initiated the acquisition, firmly held Yili's thighs. In 2023, Xinjufeng's revenue volume was about 1,737 billion yuan, an increase of 8.05% over the previous year, and realized net profit to mother of about 170 million yuan, a slight increase of 0.39%. Among them, the top five customers contributed 88.74% of Xinjufeng's revenue, and Yili, as the largest customer, contributed 71.99% of Xinjufeng's total revenue. Yili also became a shareholder of Xinjufeng in 2015.

Another major dairy giant, Mengniu, is bound by Fenmei Packaging. In 2023, Fenmei Packaging achieved revenue of about 3.817 billion yuan, a year-on-year decrease of 3.1%, and net profit of about 244 million yuan, an increase of 33.9% over the previous year. In recent years, Fenmei stopped disclosing its sales share of Mengniu, and in 2018, Fenmei Packaging's largest customer also accounted for more than 70%. Xinjufeng's acquisition of Fenmei Packaging is also, to some extent, an extension of the competition between Yili and Mengniu.

According to the acquisition plan proposed by Xinjufeng, assuming that the offer is fully accepted, Xinjufeng would need to pay about HK$2,729 billion in cash, equivalent to about RMB 2,524 billion. Even if Xinjufeng reached 50% of the shares according to the minimum standard, the company would need to buy 23.2% of the shares, or about 326 million shares, from public shareholders. At the offer price, it would require at least 800 million yuan in cash.

As of March 31, Xinjufeng's book capital was about 865 million yuan, and the total long-term and short-term interest-bearing debt was about 340 million yuan. Without the acquisition of Fenmei Packaging, Xinjufeng had plenty of capital. In the first quarter, the company purchased a large amount of structured deposits, and transactional financial assets reached 110 million yuan at the end of the period.

Xinju Feng mentioned that the relevant consideration will be paid through merger and acquisition loans. On May 9, Xinjufeng also announced that its subsidiary Jingfeng Holdings plans to sign a loan agreement with China Merchants Wing Lung to apply for a loan of HK$2,810 billion (approximately RMB 2,551 million) from CMB Wing Lung for this transaction.

As of the close of trading on May 10, the market value of Fenmei Packaging was equivalent to about RMB 3.3 billion. On the same day, Xinjufeng's stock price fell 4.39% to 8.93 yuan/share, with a market value of about 3.7 billion yuan.

Founding shareholders fiercely resisted

Xinju Feng now has two major obstacles to gaining control of Fenmei Packaging: approval of anti-monopoly policies and resistance from the original shareholders.

At the beginning of the listing, Fenmei Packaging's shares were too scattered. The founder team gathered by Bi Hua and Hong Gang held only 15.84% of the shares. As a result, the established British commercial group Yihe became the largest shareholder of Fenmei Packaging through the acquisition of the secondary market, with JSH as the main body. It's just that JSH's investment is more like a financial investment, and it has no intention of controlling the packaging.

The board of directors of Fenmei Packaging is entirely controlled by Bi Hua's team, and JSH has nominated only one director to participate in the company's operations. In the past two years, Yihe has successively sold off assets in China, including equity investment in Fenmei Packaging. Xinju Feng took the opportunity to enter.

In January 2023, Xinjufeng proposed a major asset restructuring plan to acquire about 377 million shares of Fenmei Packaging held by JSH through an agreed transfer, accounting for 28.22% of its issued common shares. However, the acquisition was fiercely opposed by Fenmei Packaging's board of directors.

Since the combined market share of the two exceeds 20%, in March 2023, Bi Hua, then executive director and CEO of Fenmei Packaging, and Hong Gang, non-executive director and chairman of the board of directors, filed an antitrust report with the Anti-Monopoly Bureau of the State Administration of Market Regulation as indirect shareholders holding 15.5% of the total shares.

At the time, Xinjufeng also received an inquiry from the Shenzhen Stock Exchange. In response, Xinjufeng stated that the acquisition did not require approval from Fenmei Packaging's board of directors, and that the acquisition did not constitute a monopoly. This review did not end until October 2023. After the transfer was completed, Xinjufeng officially became the largest shareholder of Fenmei Packaging, but it was unable to control Fenmei Packaging.

Currently, Xinjufeng's proposed acquisition still needs to be reviewed and approved by the national anti-monopoly law enforcement agency regarding the concentration of operators, and obtaining anti-monopoly approval or filing in China involved in this exchange is one of the prerequisites for the acquisition.

Mengniu made an emergency shareholding, and Xinjufeng's nomination of directors was repeatedly rejected

Up to now, the two sides have shown their own ingenuity in the battle for control. Fenmei Packaging has brought in major customer Mengniu shares, while Xinju Feng has successively nominated them in an attempt to take a seat on the board of directors.

Unlike Yili, which took a stake in Xinjufeng before the IPO, Mengniu urgently subscribed to hold shares at the point where Fenmei Packaging was in a battle for control. Currently, both have invested in packaging material suppliers through shareholding.

Currently, Fenmei Packaging's shareholders are mainly divided into two groups. Xinjufeng holds 26.8% of Fenmei Packaging's shares through its wholly-owned subsidiary and is the company's largest shareholder. Fuxing Development and Phanron hold 9.17% and 5.55% of Fenmei Packaging's shares respectively. Fuxing Development is wholly owned by the trust founded by Bi Hua, the current CEO of Fenmei Packaging, while Phanron is wholly owned by Hong Gang, one of the founders, one of Fenmei Packaging's founders. The founders team holds about 14.72% of the total shares. In addition, Mengniu holds 5.01% of the shares through its subsidiary Xueyu Investment.

In response to an inquiry letter from the Shenzhen Stock Exchange last year, Xinjufeng stated that after the acquisition was completed, Xinjufeng plans to follow JSH's layout and nominate a director to Fenmei Packaging, while respecting the founding team in order to achieve synergy effects. Then the actions of Xinju Feng meddling in the board of directors of Fenmei Packaging were frequently hindered.

After finally receiving the shares, in December 2023, Xinju Feng requested for the first time a special shareholders' meeting, proposing to appoint Wang Hang, Cai Weikang, Qiu Boyu, and Lin Sanfu as non-executive directors of Fenmei Packaging, and to appoint Wen Jiaxuan as independent non-executive directors.

It is worth mentioning that just before Xinjufeng got involved in the company's operations, Fenmei Packaging quickly brought Mengniu as an ally. In November, Fenmei Packaging signed an investment agreement with Mengniu. Xueyu Investment, a subsidiary of Mengniu, subscribed 70.5 million shares of Fenmei Packaging at a price of HK$1.62, with a total investment amount of about RMB 106 million.

At almost the same time, Fenmei Packaging agreed to Wang Bang as the company's non-executive director, and the percentage of opposition at the shareholders' meeting did not exceed 3%. Wang Bang himself is the general manager of the Tianjin New Value Procurement Management Department of Mengniu's subsidiary.

In contrast, in January of this year, Fenmei Packaging's shareholders' meeting completely rejected Xinjufeng's proposal to appoint directors. On January 26, the resolution of Fenmei Packaging's special shareholders' meeting showed that the opposition rate for the proposal to appoint Wang Hang as a non-executive director reached 58.25%, and the opposition rate for appointing Wen Jiaxuan as an independent non-executive director and appointing Cai Weikang and others as non-executive directors was 56.66%.

In response, Fenmei Packaging stated that it has received concerns and objections from major customers, believing that there is a competitive relationship between Xinjufeng and Fenmei Packaging's customers, and that Xinjufeng's participation in Fenmei Packaging's management will affect the customer's competitive pattern. In the 2023 annual report, Fenmei Packaging specifically mentioned that the company's cumulative sales of packaging throughout the year decreased by 11.6% compared to the previous year, mainly due to increased competition in the Chinese market, including but not limited to Xinjufeng.

However, Xinju Feng once again proposed a motion to appoint a director two months later. This time, Xinju Feng only requested the appointment of Wen Jiaxuan as the non-executive director of Fenmei Packaging. Just the day after Xinjufeng proposed a takeover, on May 10, Fenmei Packaging's special shareholders' meeting once again rejected Xinjufeng's proposal. This time, the opposition ratio was 51.05%.

Currently, Fenmei Packaging's board of directors includes two executive directors, Bi Hua and Chang Fuquan, two non-executive directors, Hong Gang and Wang Bang, and three independent non-executive directors of LUETH Allen Warren, BehrenSernSthermann, and Guo Kai. The vast majority of directors have more than ten years of experience at Fenmei Packaging.

Today, Xinjufeng's quest for control of Fenmei Packaging mainly depends on Fenmei Packaging's public shareholders' willingness to sell. According to the “Takeover Code”, if the final shareholding cannot reach 50% or more and the offer cannot take effect, Xinjufeng cannot issue another offer to Fenmei Packaging within 12 months from the date the offer expires.

The Blue Whale Finance reporter called Xinjufeng about the relevant situation. The company said that special personnel would make a unified response, but as of press time, no response had been received from Xinjufeng.