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Danone Raises Mengniu Stake Amid China Food Safety Concerns

Photographer: Tomohiro Ohsumi/Bloomberg

Cartons of China Mengniu Dairy Co. milk are displayed for sale at a store in Shanghai. Close

Cartons of China Mengniu Dairy Co. milk are displayed for sale at a store in Shanghai.

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Photographer: Tomohiro Ohsumi/Bloomberg

Cartons of China Mengniu Dairy Co. milk are displayed for sale at a store in Shanghai.

Danone (BN), the world’s biggest yogurt maker, agreed to pay 486 million euros ($663 million) to more than double its stake in China Mengniu Dairy Co. (2319) as the nation’s demand for dairy products rises.

The maker of Activia yogurt and Evian water said it will raise its holding in China’s largest milk producer to 9.9 percent from 4 percent through a joint venture. Danone will buy new shares at HK$42.50 each, Mengniu said today. That’s 15 percent more than its closing price yesterday.

Danone’s investment helps rebuild its presence in China about four years after a dispute with drinks maker Hangzhou Wahaha Group Co. led the Paris-based company to sell its stake in a venture in that market. Mengniu is seeking to strengthen foreign partnerships to win back consumers after a scandal involving melamine-tainted milk in 2008 left Chinese buyers wary about its products.

“China is a very big market for dairy products,” said Charlie Chen, a Hong Kong-based analyst at BNP Paribas Securities Asia Ltd. “You can’t find any other major dairy market in the world that still has such a strong growth potential.”

Mengniu Gains

Mengniu shares rose 3 percent to a record HK$37.95 at the close in Hong Kong. Danone’s stock fell 0.5 percent to 50.07 euros as of 10:16 a.m. in Paris.

Danone will benefit from expanding its yogurt business in China and the purchase may increase ties between the companies in research and development, Chen said. Danone is rebuilding its Chinese business after a product-safety scare that later proved to be a false alarm led to a drop in third-quarter baby-nutrition revenue.

After the deal, Mengniu’s state-owned parent Cofco Corp. will remain the largest shareholder with a 16.3 percent stake while Denmark’s Arla Foods will hold 5.3 percent.

Cofco, Arla and Danone have agreed to restructure their shareholding such that their combined stake of 31.5 percent will be held by the joint-venture company, Cofco Dairy Investments, according to a statement from Danone.

Danone’s investment will help Mengniu expand in chilled products such as yogurt, an area with huge growth potential in China, Bessie Wu, chief financial officer of the Hohhot, Inner Mongolia-based company, said on a conference call today.

Danone Quality

Mengniu will benefit from Danone’s quality control and improve its production efficiencies under this tie-up, Wu said.

The partnership will also help Danone boost sales in China’s yogurt market that are estimated to increase 57 percent to 71.6 billion yuan ($12 billion) by 2015, according to Euromonitor International.

Mengniu had a 16.8 percent share of the Chinese yogurt market in 2012 and Danone had 1.6 percent, Euromonitor said.

Danone’s investment follows agreements signed in May with Mengniu and Cofco to help expand its brands in the world’s most populous nation.

Today’s deal is subject to the approval of Mengniu’s shareholders, and is expected to be finalized within the next few months, according to Danone’s statement.

Danone, which sells Activia yogurt under the brand Bio and Dumex infant formula in China, operates 22 factories and employs about 10,000 employees in the country, according to its website. China accounted for about 6 percent of total sales in 2012, its fourth-largest market after Russia, France and the U.S., according to the company’s annual report that year.

Wahaha Dispute

Danone sold its stake in a venture with Wahaha in 2009. The companies were embroiled in more than 30 lawsuits as Danone accused Wahaha Chairman Zong Qinghou of unlawfully selling Wahaha-brand juice and tea outside their partnership.

China is tightening regulations to raise standards in the food and dairy industries after baby formula tainted with melamine, a chemical used to make plastics, killed six infants in 2008. Chinese consumers’ distrust of local milk has driven them to look for products overseas or turn to foreign brands. The government is pushing to consolidate the milk industry.

Mengniu has made an effort to improve the quality of its products and is winning back the trust of buyers in China, BNP’s Chen said.

Last year, the Chinese company agreed to buy a stake in China Modern Dairy Holdings Ltd. (1117) to gain greater control of milk supplies. It also invested in baby-milk company Yashili International Holdings Ltd. (1230), which sources its milk from New Zealand.

Proceeds from the transaction will be used to repay debt including a loan for the Yashili acquisition, Mengniu said today.

To contact the reporters on this story: Liza Lin in Shanghai at llin15@bloomberg.net; Ben Livesey in San Francisco at blivesey@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net; Celeste Perri at cperri@bloomberg.net

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