Chinese government summons major dairy companies

[October 17, 2008]  BEIJING (AP) -- China summoned five of its major dairy companies to a meeting Friday over the fate of Sanlu Group Co., the company at the center of a tainted milk scandal that has sickened thousands and led to the deaths of four children, state media reported.

The five companies were brought to Beijing to discuss the purchase of the company, the 21st Century Business Herald, a major business daily, reported Friday.

The government is trying to revive its dairy industry and contain the fallout after baby formula contaminated with melamine was blamed for the deaths of four infants and the sickening of about 54,000 other children in China.

The Health Ministry said Wednesday that 5,800 children were still hospitalized -- six of them in serious condition. In Hong Kong, the Department of Health said Friday two more children have developed kidney stones after drinking melamine-laced milk, bringing to 10 the total number of children with milk-related kidney stones.

Sanlu, a majority state-owned company whose products were the most heavily tainted, is now largely defunct, with companies looking to scoop up its assets. It is 43 percent-owned by New Zealand's Fonterra Group dairy.

The companies invited to the meeting were Chinese beverage-maker Wahaha Group, Wondersun, Inner Mongolia Yili Industrial Group Co., Sanyuan Foods Ltd. and Heilongjiang-based Feihe Dairy, which is a wholly owned subsidiary of New York-listed American Dairy Inc.

Both Sanyuan and Wahaha have been discussed in state media as likely buyers of Sanlu's assets, but the paper also quoted Wondersun's board chairman as saying they were considering it. But any buyer would have to take on Sanlu's debt and the possibility of compensation to consumers, the paper said.

Jin Biao, vice president at Yili, confirmed that a meeting was called by the government but said the main focus was on how to improve the management of Sanlu's milk collection stations and how to deal with the company's capital. He said Yili had sent a representative.

"It is too early now to talk about the acquisition," he said in a telephone interview with The Associated Press.

Lianfang Chen, an analyst at Beijing Orient Agribusiness Consultant Co., said the meeting would discuss resuming milk production at Sanlu's factories, keeping its workers employed, and also resume buying raw milk to keep farmers employed.

"Though Sanlu does not have any value as a brand, its processing facility, raw milk bases, production capacity and experienced workers and managerial expertise still have great value. That's what makes a selling point," Chen said.

Fonterra chief executive Andrew Ferrier said Friday that discussions continuing around Sanlu "include the possibility of Sanlu being acquired by a third party," and Fonterra is involved in a number of the discussions.

But he said the long-term future of Sanlu "and Fonterra's stake in the company" remained uncertain. Fonterra wrote down $85 million of its stake last month, but has retained on its books an estimated $38 million worth of its investment.

A spokesman for Fonterra said they did not send anyone to the meeting but expect to be briefed by representatives of Sanlu, who are taking part.

[Associated Press; By HENRY SANDERSON]

Associated Press writer Ray Lilley in Wellington, New Zealand, contributed to this article.

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