The investment comes as China is seeking overseas assets and knowhow to secure its own food supply chains and strengthen domestic production.
Danone will take a 25 per cent stake in Yashili, diluting Mengniu to 51 per cent from 68 per cent. Shares in Mengniu jumped 2.2 per cent on the news in Hong Kong while investors pushed Yashili 7.6 per cent lower, mindful of the dilution. The French group paid HK$3.7 a share in a private placement, a 17 per cent premium to Thursday’s close.
Elaine Sun, chief executive of Mengniu and chairman of Yashili, said the tie-up would facilitate Yashili’s expansion in the Chinese market via a wider choice of products “that are safe, healthy and of the very highest quality.”
The deal is the latest step in China’s efforts to improve the reputation of its homegrown dairy industry, where parents’ distrust of local milk powder since the melamine-tainted baby formula scandal in 2008 has led to shortages and restrictions around the world.
“Danone has state-of-the-art research and development in baby milk while Mengniu has the distribution,” said one person familiar with the deal.
Danone and Mengniu first joined forces in May 2013 with the French group injecting €325m into two joint ventures focused on yoghurt. As part of that deal, Danone took an indirect 4 per cent stake in Mengniu through Cofco, the Chinese state-owned agribusiness that is Mengniu’s largest shareholder. Earlier this year, Danone spent €486m to lift that stake to 9.9 per cent.
Song Liang, an independent dairy analyst-based in Beijing, said the deal should help Danone expand more quickly by using Yashili’s distribution networks in lower-tier Chinese cities, to help it penetrate beyond the top-tier markets that have to date been favoured by international rivals such as Nestlé.
“Local brands such as Mengniu and Yashili also hope to improve their brand reputation with the perception that they are co-operating with Danone, which has the most recognised milk formula brands among Chinese consumers,” added Ms Song.
HSBC advised Danone on its latest deal while Barclays advised Yashili.
China’s $15bn baby milk market is expected to roughly double in size by 2017, encouraging increasing competition and pitting trusted international names against newly resurgent local brands that are being aided by subsidies.
In August, New Zealand’s Fonterra bought a 20 per cent stake in Hangzhou-based Beingmate Baby and Child Food for $515m.
This fresh wave of milk deals is just one expression of China’s overall concern with building better supply chains both locally and overseas.
Last year China was involved in a sixth of food-related deals globally, having never managed more than 2 per cent in the preceding five years.
In September, Cofco finalised a $1.5bn agribusiness joint venture with Noble, the Singapore-listed commodities trader – China’s second biggest-ever overseas food deal after the 2013 $7bn purchase of Smithfield Foods by what is now WH Group.
This week Cofco announced plans to eventually float its trading acquisitions to help put it on a par with the companies that dominate world grain trade, including Cargill and Archer Daniels Midland.
Source: Financial Times
