China's $600m Lion dairy takeover may have hit a political snag

Speculation is mounting Treasurer Josh Frydenberg could block Chinese buyer Mengniu Dairy Company's expansion in Australia.

With political and trade relations straining over Chinese threats to impose more export penalties on Australian agricultural and food products, the Treasurer is reportedly reluctant to approve the Lion Dairy and Drinks deal with the Inner Mongolian-based, Hong Kong-listed Mengniu.

This week the wine industry was sent into a spin when China flagged a year of wine export uncertainty, announcing an investigation into dumping claims against Australian winemakers selling to the lucrative Chinese market.

The national milk processor and fruit juice business announced the sale to Mengniu in November last year, about 12 months after Lion's Japanese owner, Kirin had put the business up for sale.

In February the Australian Competition and Consumer Commission gave its approval of the purchase.

Although Mengniu already owns Tasmanian-based Bellamy's Organic dairy formula business and is indirectly a major stakeholder in milk processor Burra Foods, the competition watchdog rejected concerns about the sale being a threat to farmgate milk market competition in Victoria's Gippsland region.

Lion owns two milk plants at Chelsea and Morwell in Gippsland, while Burra Foods has a milk processing plant at Korumburra.

Mengniu has owned Bellamy's Organic dairy business in Tasmania and Victoria since paying $1.5 billion for it late last year after getting national security clearance for the takeover from the Treasurer.

However, The Australian Financial Review has reported, despite the Foreign Investment Review Board being comfortable with Mengniu Dairy's latest deal, government officials have told Lion there are no plans to approve this sale, apparently in light of "diplomatic issues" currently at play.

A Lion Dairy and Drinks spokesperson would not comment on the speculation, simply noting the ACCC said it would not oppose the proposed acquisition and the sale was now "continuing through the FIRB review process".

Kirin and Lion decision's to sell to the Chinese had been going through regulatory reviews for about 10 months.

Prominent business and finance commentator Peter Switzer said Mr Frydenberg may have made a big call, or gamble, on Australia's relationship with China.

He observed there was no farmland involved in the Lion sale proposal, the dairy business was already foreign-owned by the Japanese, and FIRB and Treasury officials had reportedly given the thumbs up to the deal.

"Given that, it's hard not to think that we're caught in a political ping pong game that could have serious economic consequences," he said.

"This is an early stage in this political ping pong game and you have to hope that the stakes aren't raised, such that Beijing starts to look at our exports of iron ore to China."

Those exports were worth almost $80b a year - 30 per cent of Australia's total iron ore production.

"You wouldn't want to think about what would happen to BHP's, Rio's and Fortescue's share prices if they got caught in the crossfire," Mr Switzer said.

He noted, although China's reasons behind its allegations about Australia dumping wines at artificially low prices could be "dodgy", Treasury Wine Estates's share price had fallen about 25pc this week because of the action.

"It's great to see a feisty Treasurer showing we won't be bullied by the likes of China, but we have to be careful our toughness doesn't come back to bite us, investment-wise and our budget's bottom line."

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