A government-led consolidation of Shanghai's food and beverage industry to create China's largest food and drinks conglomerate is taking shape, with all companies confirming the proposed transaction yesterday.

Shanghai-based food and beverage manufacturing and retail groups Shanghai Tobacco, Sugar & Wine (Group) Co, Shanghai Agriculture Industry Commerce (Group) Co, Bright Dairy & Food Co and Shanghai Meilin Zhengguanghe Group are to be incorporated into the new Bright Dairy & Food group, with total assets estimated at 45 billion yuan (US$5.63 billion).

The four groups are producers of many well-known Chinese brands such as Bright milk, White Rabbit confectionery, Guangshengyuan snacks, Shangshi meat products and Shikumen liquor.

Except Bright Dairy, which is a publicly traded firm itself, the other three groups are State-owned enterprises, all holding controlling stakes in listed units Shanghai First Provisions Store Co, Shanghai Urban Agro-Business Co, Shanghai Haibo Co and Shanghai Maling Aquarius Co.

The consolidation was "in accordance with the reform initiatives of State-owned enterprises," Bright Dairy and the four listed units said in a joint statement filed to the Shanghai Stock Exchange yesterday.

The preliminary restructuring plan for the new group may come out as early as August and the new conglomerate may be set up any time after that, the Shanghai Securities News quoted unnamed insiders as saying.

Consolidation of the companies was first suggested almost three years ago in the face of weak performances from many of the firms involved and growing competition from foreign newcomers. The consolidation aimed to create an industry giant encompassing all links, thus slashing costs and improving efficiency. Yet little progress was made due to the capital structure complexity of the companies.

However, the consolidation may not come as early as suggested, many analysts believe.

"The restructuring will stay at the group level until at least the end of this year and will hardly go to the level of listed companies," said Peng Danxue, an analyst with Everbright Securities.

Prices of all five listed firms surged on the confirmation of the consolidation, from over 6 to 10 per cent, except Bright Dairy, which rose by 3.15 per cent. By comparison, the benchmark Shanghai Composite Index only edged up a tiny 0.04 per cent to close at 1665.94 points.

"The consolidation is more positive for smaller firms involved who badly need a change, yet for Bright Dairy, the impact may be mixed as the restructuring will sway its newly contemplated strategies," said Zhao Jinhou, an analyst with Shenyin Wanguo Securities.

The five listed firms' stocks have seen volatility amid mounting discussion and speculation about the restructuring in the Chinese media. "Unpredictability of these companies' stock prices will continue," said Shenyin Wanguo's Zhao.

Following the consolidation, some of these listed firms may be terminated from trading or be turned into shell companies to be acquired by firms that wish to gain a backdoor listing.

Discussion and speculation regarding the restructure has been mounting in the past month. The consolidation may follow that of the city's retail industry years ago, which led to the establishment of the Shanghai Brilliance (Group) Co.

Source: China Daily