Danone ups stake in China’s top dairy firm with €486m investment

Danone is spending €486m to lift its stake in China’s top dairy firm, aiming to tap into booming local demand and secure greater control over supply quality in a region often hit by food safety scares.

The investment in China Mengniu Dairy by the world’s biggest yoghurt maker, whose brands include Actimel and Activia, will boost its holding to 9.9% from 4%, making it the Chinese company’s second-biggest shareholder after China’s Cofco Dairy Investment.

“This will allows us to pursue our ambition to expand in the fresh dairy category in China and benefit from its great potential,” a Danone spokeswoman said yesterday.

China is already an important market for Danone, accounting for around 6% of global sales of €20bn. But fresh dairy products make up less than 3% of its sales to China and the spokeswoman noted China’s annual per capita consumption of fresh dairy products is 1.1kg, or just 3% of what it is in France.

Sales of dairy products in China are expected to nearly double from 2012 to 2017 to about €65bn, according to projections&.

China is also an important market for Danone’s baby food division, which makes up 20% of group sales, making it the number two contributor after dairy.

Danone’s latest commitment to China comes after it suffered a series of setbacks last year, including being fined for anti-competitive practices after a probe into price-fixing. It also recalled infant formula products in Asia due to an unfounded health scare stemming from New Zealand-based supplier Fonterra.

Such problems have eroded Danone’s image with Chinese consumers, analysts have said, and closer ties with state-owned Mengniu could potentially help smooth relations with Chinese authorities and consumers.

Analyst Francis Pretre at brokerage CM-CIC Securities said the deal would allow Danone to “pursue its expansion in Asia in a more serene way, securing its supplies in terms of volumes as well as quality”.

Mengniu shares rose as much as 9.5% to an all-time high of HK$40.35 (€3.82), although the stock gave up much of those gains as traders locked in profit from the past year’s rise of more than 65%.

“Danone’s willingness to pay a premium for the stake suggests that they are bullish over the long-term prospects of China’s dairy industry,” said Alex Wong, a director at brokerage Ample Finance Group.

Booming Chinese demand for dairy products has sparked a raft of deals in the country’s dairy sector. Food-safety scares have also boosted demand for foreign baby milk formula, pushing Chinese dairy firms to seek ties with foreign makers.

Danone, also maker of Bledina baby food and Volvic water, formed an alliance with Mengniu in May 2013, under which the companies agreed to produce and sell chilled yoghurt products in China, pooling assets to form a venture with 2012 proforma sales of €500m and an estimated market share of around 21%.

Under the deal, Danone and Cofco Dairy Investment, a venture with China’s state-owned Cofco, will subscribe to a reserved rights issue by Mengniu at HK$42.5 per share, a 15.3% premium to Mengniu’s previous close.

Cofco, Danone and dairy cooperative Arla Foods, Mengniu’s three core shareholders, will combine their stakes within Cofco Dairy Investments, Danone said in a statement. Cofco owns 16.3% of Mengniu and Arla owns 5.3%.

Danone has long aimed to establish a major presence in China. Its first joint venture with China’s largest beverage company, Hangzhou Wahaha Group, fell apart in 2009 after 13 years.

China’s dairy industry is dominated by local companies including Modern Dairy, China Huishan Dairy Ltd and YST Dairy. But foreign players have taken a significant role in niche markets such as milk powder after a 2008 food safety scandal.

Mengniu plans to use the proceeds to cut debt.


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