A food scare involving contaminated dumplings imported from China by Japan Tobacco has scuttled a deal to merge the company's frozen food business with that of Nissin Food Products, the companies said on Wednesday.
The scrapping of the deal, which would have created the nation's biggest frozen food firm, arose after Nissin, the pioneer of instant noodles, proposed taking control of the planned company instead of Japan Tobacco.
"We felt there were differences between JT and us on the issue of safety," Nissin President Koki Ando told a news conference.
"We wanted to take the lead on safety and do so from a position of responsibility, but JT wanted to be responsible so our proposal was knocked back," Ando said.
Nissin shares slid more than 7 percent in afternoon trade, compared with a 4 percent decline in the overall market while Japan Tobacco fell nearly 2 percent.
The Chinese-made dumplings have made 10 Japanese sick, and Japan's health minister raised the possibility on Tuesday that the food had been deliberately contaminated with pesticide.
Japanese police are investigating the case on suspicion of attempted murder after a five-year-old girl fell critically ill from eating the dumplings, which are known as gyoza in Japan and are normally eaten after dipping in soy sauce. The girl has since recovered.
Both Tokyo and Beijing have called for close cooperation in the case, which has prompted huge Japanese media coverage and health queries from nearly 4,000 people.
A joint Chinese-Japanese investigation into the Chinese food factory that was the source of the dumplings had found nothing amiss at the plant, Chinese state media reported.
Japan Tobacco, the world's third-biggest cigarette maker, had planned to combine its frozen business with that of Nissin after buying a third frozen food firm, Katokichi, for $1 billion and selling a 49 percent stake in Katokichi to Nissin.
"Our frozen food business is in a state of crisis," Japan Tobacco Chief Chief Executive Hiroshi Kimura said. "First we have to get our and Katokichi's food business back on track."
Japan Tobacco has already bought 94 percent of Katokichi and plans to make it a wholly owned unit as soon as possible.
Japanese media have reported it also faces an insider trading probe after its shares tumbled 8 percent on Jan. 28, two days before it announced it was recalling the dumplings.
The company on Wednesday played down the likelihood of any improper trading and said it had yet to hear from regulators.
"The number of people who would have known of the problem was very few, and it is difficult to imagine there was insider trading," Kimura said.
The mystery of the poison dumplings is a delicate matter for sensitive Sino-Japanese ties and a domestic headache for Prime Minister Yasuo Fukuda, given criticism from media and opposition lawmakers that it took too long to alert the public after the first consumers fell ill in late December.
Japanese experts have said the chemical first detected in the dumplings is used widely in China but not in Japan, although Kyodo news agency said China banned its use this year.
Chinese officials have travelled to Japan to help with investigations, as both countries seem eager to keep from harming two-way ties ahead of a high-profile visit by Chinese President Hu Jintao this spring, the first such trip in a decade.
Japan, always sensitive about food security, imports more than one-fifth of its frozen food from China.