Danone boosts stock ownership in Mengniu

French dairy company Danone said Wednesday it will increase its shareholdings in China Mengniu Dairy to 9.9 percent through a private placement worth HK$ 5.15 billion ($664 million), making it the second-largest shareholder in Mengniu.

China Mengniu will issue 121.24 million shares to a venture company formed by Danone and China's State-owned food and oil manufacturer COFCO Corporation at HK$42.5 per share, according to a statement posted on the Hong Kong bourse by Mengniu.

Mengniu CEO Sun Yiping said in the statement that her company hopes to work closely with COFCO, Danone and Danish dairy firm Arla Foods to become a global dairy products producer.

"Chilled yogurt business has a faster growth rate than the fresh dairy products business, and Mengniu hopes Danone's increased stock ownership could contribute to its yogurt production and sales," Chen Lianfang, an analyst from Beijing Orient Agribusiness Consultant, told the Global Times Wednesday.

Mengniu's major rival Yili Group has a bigger slice of China's overall dairy market, but Mengniu is currently the market leader in yogurt products, said Chen.

Danone, the world's biggest yoghurt maker, purchased Mengniu shares at a 15.3 percent premium to the share price of the previous trading day, according to the statement.

Prior to the private placement, Danone held about 4 percent of Mengniu stocks.

Danone hopes the enhanced level of cooperation with Mengjiu could help Danone gain access to China's huge dairy market and better promote its brand, said Franck Riboud, chairman and CEO of Danone Group.

"The deal could prove to be a valuable one as an investment with good returns, and also secure more dairy resources for cheese and diversify Danone's product line, and streamline its business structure," Yan Qiang, a senior analyst on dairy industry with Beijing-based Hejun Consulting, told the Global Times on Wednesday.

Danone's attempt to enter the Chinese market solely through its own efforts had proved a failure, and it needed to tie itself up with a local player with a strong brand value, Chen said, explaining what the deal meant for Danone.

With a large population base and low milk per capital consumption level, China as a market for dairy products has huge potential, so the increase of its stake in Mengqiu would also be a confidence boost for Danone's investors, according to Yan.

After the deal, COFCO, Danone, and Arla Foods will respectively own 16.3 percent, 9.9 percent and 5.3 percent of Mengniu shares.

Mengniu plans to use the proceeds to reduce debt and consolidate its capital structure.

In June 2013, Mengniu acquired Guangdong-based Yashili International Holdings Ltd with 9.73 billion yuan ($1.61 billion) as part of a plan to expand its milk powder business.

In the first half of 2013, Mengniu's milk powder business realized operating revenue of 451 million yuan while its rival Yili's milk powder business reaped 3 billion yuan in revenue, according to the two firms' interim reports.

Information about Mengniu's latest financial results was not available to the public by press time.

However, Danone's increase of its Mengniu shares is not likely to produce any major impact, Chen told the Global Times. The same opinion was shared by Yan.

Lifted by the news, Mengniu's shares skyrocketed as much as 9.5 percent to HK$40.35, but the price retreated as investors cashed in at the closing.