Danone’s China Formula Buy May Cool Mead Johnson Speculation

Danone’s $566 million purchase of a stake in a Chinese infant formula maker signals the French food company favors a gradual expansion in that market, which analysts say may cool speculation about a takeover of Mead Johnson Nutrition Co.

Danone said today it’s purchasing 25 percent of Yashili International Holdings Ltd., which would sap financial resources from a potential acquisition of the Glenview, Illinois-based competitor. Mead Johnson, the baby-formula maker that had the largest share of the Chinese market last year, has a market value of about $20 billion after its shares fell.

“A purchase of Mead Johnson won’t be a first solution for Danone in the short- to medium-term,” Pierre Tegner, an analyst at Natixis in Paris, said by phone. “Danone is taking baby steps in China.”

Danone has been rebuilding its Chinese infant formula business after bribery claims and a false alarm over food safety led to a decline in profit last year. Shares of Mead Johnson reached a record this month on renewed speculation Danone would buy it. The U.S. company’s shares dropped as much as 6.6 percent today, while Danone advanced as much as 3.3 percent.

The U.S. company sold 11.1 percent of the baby formula in China last year, ahead of Nestle’s 10.6 percent and Danone’s 10.1 percent, according to Euromonitor data.

The Paris-based company said Oct. 20 it hadn’t settled on priorities for external growth after Reuters said it decided it wants to acquire Mead Johnson. Representatives for Danone didn’t immediately respond today to phone calls and e-mails seeking comment.

Going Alone?

“Incremental purchases like this in China make strategic sense as it’s the world’s fastest-growing market for infant milk formula,” Jon Cox, an analyst at Kepler Cheuvreux in Zurich, said by phone. “This points to Danone spending cash on smaller purchases, rather than one big purchase such as Mead Johnson.”

The investment in Yashili broadens Danone’s role in China’s baby-formula market, which is projected to more than double to 191 billion yuan ($31 billion) in the four years ending 2017, according to Euromonitor International. That growth outlook has led to intensifying competition, with analysts predicting a 13 percent drop in annual sales this year at Yashili, a unit of China Mengniu Dairy Co., according to data compiled by Bloomberg.

“Danone is trying to turn around its infant formula business in China on its own,” Alain-Sebastian Oberhuber, an analyst at MainFirst in Zurich, said by phone.

Danone, which also owns Activia yogurt and Evian water, climbed 2.8 percent to 54.19 euros at 3:44 p.m. in Paris. Mead Johnson slid 4.4 percent to $99 in New York, while Yashili shares dropped 9.2 percent to HK$2.88 in Hong Kong.

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