Primary culprit in milk scandal goes bankrupt

By Jin Jing  |   2008-12-25  |     NEWSPAPER EDITION

SANLU Group Co, the dairy producer at the center of the melamine milk scandal that left six infants dead and sickened more than 294,000, has been declared bankrupt.

A court in Shijiazhuang, Hebei Province, where the company is based, issued the bankruptcy order after a complaint from a creditor, Sanlu's foreign partner Fonterra said yesterday.

Sanlu will be managed by a court-appointed receiver who will monitor the orderly sale of the company's assets and payment to creditors within the next six months.

"We were aware that Sanlu was in a very difficult situation and faced mounting debts as a result of the melamine contamination crisis," Fonterra Chief Executive Officer Andrew Ferrier said in a statement posted online.

In September, Sanlu was the first Chinese dairy maker to be caught selling infant milk powder contaminated with melamine, a banned industrial chemical that was used to mimic higher protein levels and mask diluted milk.

Tainted milk was later found in the products of 22 Chinese dairy companies, causing widespread kidney and urinary tract problems in the children exposed to it.

Fonterra, a New Zealand farmer-owned cooperative that holds 43 percent of its venture with Sanlu, said earlier that it had written off its NZ$200 million (US$113 million) investment in Sanlu.

"The bankruptcy is not a surprise with the collapse of the brand," said Huang Mao, an analyst at Guosen Securities Co Ltd.

"It's an ideal option to deal with Sanlu's heavy financial burden, which may also provide an easier way for other companies to take over Sanlu's valuable assets and help distributors receive compensation," said Guo Changsheng, an analyst at Shanghai Securities Co Ltd.

The scandal has been met with public anger in China, especially among parents whose children were sickened from drinking infant formula authorities had certified as safe.

The government has promised free medical treatment to those children, plus unspecified compensation to them and families of the dead.

The Health Ministry said earlier this month that some Chinese dairy companies would likely have to pay for a compensation plan.

Citing an anonymous source from Sanlu, the National Business Daily reported yesterday that the company's current remaining assets are valued at about 1.6 billion yuan.

The source said in the report that under the government's compensation plan, Sanlu is likely to pay 900 million yuan to families. The dairy also owes more than 600 million yuan to distributors for goods returned when it recalled its products nationwide in September.

Worried about being left out, nearly a thousand distributors across the country turned up in Shijiazhuang on Tuesday hoping to have Sanlu certify its debts with them, according to media reports.