Danone to form joint venture with Mengniu

China Mengniu Dairy Co, the country's largest yogurt producer, announced Monday that Danone Group, a leading French food group, has agreed to invest $417 million in two deals with the company, a move expected to help Mengniu restore consumer confidence in locally produced dairy products.

China National Cereals, Oils and Foodstuffs Corp (COFCO), Mengniu's parent group, has agreed to form a joint venture with Danone in the dairy business by selling its shares to the newly formed company, a statement sent by Mengniu to the Global Times showed Monday.

Danone will become a strategic shareholder in Mengniu, owning an indirect interest of 4 percent at first but which it aims to increase in the future, although COFCO will remain the single largest shareholder.

Meanwhile, Mengniu and Danone will also set up a joint venture to combine their yogurt businesses in China to focus on production and sales of chilled yogurt products.

Danone, the world's largest yogurt producer, will own 20 percent of the new yogurt company while Mengniu will hold the remaining 80 percent of shares.

"The joint venture will achieve synergies by introducing Danone's undisputed worldwide expertise in quality and product innovation, while fully leveraging Mengniu's leadership and distribution capability in China's yogurt category," the statement said.

"The deals bring each partner what they need," Wang Dingmian, head of the Guangzhou Dairy Industry Association, told the Global Times Monday. "Food security scandals have continued to besiege Mengniu since COFCO became its largest shareholder in 2009. The partnership with Danone will help Mengniu to restore consumers' trust."

Danone has been in the Chinese markets for two decades but has never made any breakthrough in terms of profits. It's time for Danone to either find a way to gracefully exit the Chinese markets or find a strong Chinese partner to help it turn around. COFCO can act as its patron in China, Wang said.

Mengniu holds the largest market share with 16.8 percent in China's yogurt market, while Danone has 1.6 percent, Bloomberg reported Monday, citing data from British market researcher Euromonitor.

"COFCO and Mengniu want the advanced management skills and technology as well as strict quality control from Danone," Ma Wenfeng, an analyst with Beijing Orient Agribusiness Consultant Co, told the Global Times Monday.

"But the partnership faces many challenges. In China, there are many strong local yogurt brands which are already well-accepted by consumers. It's hard for a new venture to gain a large market share in a short time," Wang said.

In 1996, Danone formed a joint venture with China's largest beverage maker Hangzhou Wahaha Group, but the partnership was aborted in 2009 after the two companies became embroiled in lawsuits where Danone accused Wahaha of illegally selling the Wahaha brand products outside their partnership.