Kirin Holdings Co has pulled the pin up on a deal that would have seen the Japanese company’s wholly-owned Australian dairy firm Lion Dairy & Drinks sold to a Chinese company.

The announcement follows reports the Australian government could block the deal in its first veto since announcing a shake-up of foreign investment laws in July.

Kirin on Tuesday agreed with China’s Mengniu Dairy Co to terminate a $600 million transfer deal signed in November because the Foreign Investment Review Board was unlikely to approve it.

“This is an unfortunate result,” Kirin said in a statement.

“But the revival and restructuring of Lion Dairy & Drinks are a top priority and we will continue to look for the best scenarios for the business with Lion.”

Lion Dairy & Drinks, formerly known as National Foods, is a major dairy company that produces, markets and distributes some of Australia’s best-known brands in milk, dairy beverages, yoghurt, juice and soy.

The Australian Financial Review reported last week that Treasurer Josh Frydenberg planned to go against the advice of the FIRB, which was in favour of approving the deal.

The deal had previously won approval from Australia’s competition regulator in February.

Revised foreign ownership laws give the treasurer last-resort power to vary or impose conditions on such deals or force divestment in the event of a national security risk.

The changes came against the backdrop of increasing China-Australia diplomatic tensions after Canberra called for an international inquiry into the origins of COVID-19, which was first reported in China at the end of last year.

The sale of Lion Dairy would have advanced Kirin’s strategy of offloading underperforming assets.

It would also have given the Chinese government part-owned company control of Australian household brands like Pura, Dairy Farmers and Dare flavoured milk.