Treasurer Josh Frydenberg’s reluctance to approve the controversial sale of Australia’s Lion Dairy to China Mengniu Dairy is due to concerns about the strategic risks attached to Beijing-backed ownership, according to one expert.
Salvatore Babones, an associate professor at the University of Sydney, told The Epoch Times on Aug. 26 that even though Lion Dairy is owned by major Japanese beverage firm, Kirin Holdings. The prospect of a significant Australian business falling under Chinese ownership was a major concern.
“Although Lion Dairy is already foreign-owned, its Japanese owners have always run it as an Australian company,” Babones said.
“The concern with Chinese ownership is that Chinese companies have often run their foreign subsidiaries for the benefit of their Chinese operations. For example, in case of a food shortage, Mengniu might redirect Lion’s output to China, disrupting the Australian market,” he added.
“For Mengniu, Lion is not just a financial investment, but a strategic investment, and that is a problem,” he continued.
Mengniu has been shrouded in controversy over its connection with the 2008 contaminated milk powder scandal and substituting ingredients in its products.
On Aug. 25, Kirin Holdings confirmed in an investor update (pdf) that the $600 million sale was unlikely to receive approval from the Foreign Investment Review Board (FIRB), which was the last hurdle before the deal could be finalised.
“Given this approval has not been secured to date and is unlikely to be forthcoming at this time, regrettably, the parties have agreed to terminate the Agreement,” Kirin said in the statement.
Frydenberg released a statement on the same day, saying the decision was in line with his “preliminary view to Mengniu Dairy that the proposed acquisition would be contrary to the national interest.”
On June 5, Frydenberg, along with Prime Minister Scott Morrison announced new laws tightening the foreign investment regime in Australia, giving the treasurer far-reaching powers to veto potential deals.
Frydenberg noted: “The world over, governments are seeing foreign investment being used for strategic objectives, and not purely commercial ones.”
Mengniu Dairy is 31 percent owned by China National Oils, Foodstuffs and Cereal Corp., a state-owned entity and China’s largest importer and exporter of food.
Bianca Jennings, a partner at Piper Alderman and foreign investment specialist, told The Epoch Times on Aug. 26, that the new law places the national security as a primary consideration, other factors considered include local competition, Australian government policy, and the character of the investor.
“The extent of Mengniu’s existing investments in Australia would have been an important consideration for the government,” Jennings said. Last year, Mengniu acquired Bellamy’s Organic for $1.5 billion, a deal the treasurer did approve.
However, in 2020, the Beijing-Canberra relationship has dramatically changed. The new foreign investment regime introduced by Frydenberg places greater scrutiny over such deals and closes gaps in the law.
For example, under the previous law, the FIRB would only review foreign investment deals if the business is valued over $275 million.
“By way of example, this means that a foreign investor could acquire a company that is the sole supplier of critical technology to the Australian Defence Force without the need for the transaction to be screened by FIRB, simply because the company’s valuation is less than $275 million,” Jennings said.
The new law gives the government and FIRB authority to review acquisitions regardless of value.
Jennings noted however that this would increase complexity for foreign companies to invest in Australia.
“Foreign investors seem to understand the need for the national security test; however, early feedback suggests that many foreign investors are of the view that the ‘national security test’ needs to be defined with greater certainty,” she said.
“It will be difficult for the government to find the right balance in this context, given the need to allow for the evolving nature of national security risks,” she added.