Danone agrees €325m joint venture with China’s biggest dairy producer

Danone, owner of Activia yoghurt and Evian water, will spend about €325m to form a joint venture and invest in China’s biggest dairy producer to expand its brands in the most populous nation.

Danone will have an initial indirect interest of about 4% in China Mengniu Dairy Co, with the aim of increasing that in the future, the Paris-based company said in a statement.

It will also set up a venture with Mengniu for yoghurt products in China. Mengniu shares surged the most in four years.

The venture will help Danone boost sales in China’s yoghurt market, which Euromonitor International estimates will grow 57% to 71.6bn yuan (€0.9bn) by 2015.

Mengniu gains the investment as food scandals including contaminated baby formula, rat meat sold as mutton, and excessive antibiotics in chicken have fuelled demand for better quality control in the world’s second-largest economy.

“The deal will help strengthen the research and development and capability of Mengniu’s yoghurt business, and potentially help them increase market share in China,” said Charlie Chen, a Hong Kong-based analyst at BNP Paribas Securities Asia.

“Through its ventures with Arla and Danone, Mengniu is also building a better brand image among consumers.

Mengniu closed 10.4% higher at HK$27.05 in Hong Kong trading yesterday, the biggest gain since Apr 14, 2009.

It formed a strategic partnership with Danish dairy firm Arla Foods in 2012 to improve quality inspection techniques and explore further co-operation. Danone shares were little changed at around €58 for most of yesterday.

The agreement is the first partnership for the French company in China since the end of one with Chinese drinks maker Hangzhou Wahaha Group Co in 2009, Agnes Berthet-d’Anthonay, a spokeswoman for Danone, said yesterday.

The companies were embroiled in more than 30 lawsuits as Danone accused Wahaha chairman Zong Qinghou, now China’s richest man, of unlawfully selling Wahaha-branded juice and tea outside their partnership.

Mengniu and Danone first disclosed plans to form a venture to sell yoghurt products in China in 2006, the Danone spokeswoman said. The companies terminated plans a year later due to “administrative reasons” and left the door open for future collaboration, she said.

The local partnership will increase the reach of Danone brands in China, the company’s chief executive Franck Riboud said in a statement yesterday.

It will own 20% of the yoghurt venture with the rest owned by Mengniu, according to the statement.

Mengniu had a 16.8% market share in China’s yoghurt market in 2012, with Danone holding a 1.6% share, stated Euromonitor.

Danone will benefit from Mengniu’s extensive distribution channels in China, and also possibly gain access to the company’s production bases there, said Olive Xia, an analyst at Core Pacific- Yamaichi International Ltd in Shanghai.

Danone, which sells Activia yoghurt under the brand Bio and Dumex infant formula in China, operates 22 factories and employs about 10,000 workers in the country.

The Asian nation formed about 6% of the group’s consolidated sales in 2012, its fourth-largest market after Russia, France and the US, according to the company’s 2012 annual report.