Poison Dumplings Kill Japanese Merger

A scandal over pesticide-tainted gyoza imported from China sparks a row and stops a deal between Japan Tobacco and Nissin Food Products

The overnight slump in U.S. stocks was the overwhelming reason for Japan's Nikkei 225 index plunging 4.7% on Feb. 6. But for Nissin Food Products, the company that brought the world instant noodles, it was the continuing fallout from a scandal over contaminated dumplings that sent shares into free fall, tumbling 8.5%.

Nissin's stock is the latest innocent victim of a batch of tainted, Chinese-made gyoza dumplings, imported by Japan Tobacco's food arm, which led to more than 10 cases of food poisoning. News of the poisonings broke last week (BusinessWeek.com, 1/31/08) and triggered a slew of recalls of products produced by Tianyang Food, the Chinese producer of the dumplings. A huge news story in Japan, the scandal also renewed fears among consumers over the safety of Chinese products.

Merger Terms at Issue

On Feb. 6, the safety scare claimed its biggest corporate victim yet. Japan Tobacco (JT) and Nissin announced they had canceled a planned merger of their frozen food businesses amid the continuing fallout from the scandal. After JT acquired Katokichi, Japan's largest frozen food company, for about $1 billion in November, the two Japanese companies had agreed for Nissin to take a 49% stake in a new, wholly owned subsidiary.

But with JT's reputation taking a battering, Nissin now says it wants to change the terms of the agreement. "We offered to raise our planned shareholdings in Katokichi to 50% in a bid to take the initiative in implementing safety measures, following the revelation that Chinese-made gyoza dumplings were tainted with pesticide, but JT turned down the proposal and we decided to call off the plan," Nissin President Koki Ando told reporters Feb. 6 in Tokyo. He added that the gyoza scandal is "affecting the entire food industry" and that Nissin "wanted to take the lead on safety and do so from a position of responsibility."

JT, which has published public apologies in Japanese newspaper ads, hit back in a separate press conference saying the scandal was no reason to be toying with merger ratios. "The immediate task at hand is to take the lead in resolving the problem," JT President Hiroshi Kimura told reporters.

Kimura also had to defend suggestions in the Japanese media that JT may face an insider-trading investigation after its shares slipped 8% on Jan. 28—before the company had announced any recalls. Kimura said, though, that insider trading was unlikely as very few people in the company were aware of the problem at that time. In trading Feb. 6, JT's stock outperformed the wider market, falling just 0.9%.

Full Explanation Elusive

For sure, JT will be looking for answers on how the contamination occurred. The problems date back to Jan. 30 when JT Food found that dumpling products imported into Japan from Tianyang were tainted with a phosphorus-based insecticide. The victims included five members of one family, who suffered bouts of diarrhea and vomiting after eating the dumplings, which contained traces of an organophosphate called methamidophos. The family members entered the hospital after their 5-year-old lost consciousness.

But while people in Japan have served up numerous theories on the cause of the contamination, a convincing explanation has proved elusive. The Chinese media reported that preliminary tests of batches of dumplings were negative and that there is nothing amiss at the factory where they're produced. Meanwhile, Japanese Health Minister Yoichi Masuzoe suggested on Feb. 5 that the poisonings may have been intentional. "Judging from the circumstantial evidence, we'd have to think that it's highly likely to be a crime," the minister told reporters. But even if that is the case, it will be hard to tell whether the crime happened in Japan, where the pesticide in question isn't used, or China.

Further complicating the situation, on Feb. 5 a distributor in Japan said that high levels of another type of pesticide, dichlorvos, were found in gyoza made by Tianyang last year, although the contamination led to no reported cases of illness. To help find an answer and avoid undue political bickering Chinese and Japanese officials met Feb. 6 and agreed to cooperate to find out the cause of the current cases.

What is clear, though, is that after the collapse of the deal, which analysts had welcomed, Nissin's stock price and JT's reputation are hurting.