French food group Danone takes second chance with China Mengniu

HONG KONG Mon May 20, 2013 9:59am EDT

1 of 2. Products of China Mengniu Dairy are displayed at a news conference announcing the company's annual results in Hong Kong in this September 8, 2009 file photo.

Credit: Reuters/Tyrone Siu/Files

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HONG KONG (Reuters) - Danone Group (DANO.PA) has agreed to invest 325 million euros ($417 million) in two deals with China Mengniu Dairy Co Ltd (2319.HK), marking a comeback for the French group in China where scandals have hurt confidence in food safety.

The deals with Danone are seen as an attempt by Mengniu - twice hit by accusations that it sold tainted milk - to restore trust and join forces with a leading international brand eager to tap China's rising demand for milk and yoghurt to counter falling dairy sales in Europe.

"Mengniu can, through a foreign partner, bring in new technology and technical know-how on the way to producing much safer dairy products to ease consumers' concerns over the quality of locally made products, while Danone can open its door to access the vast China market," said Andrew To, director of research at Hong Kong-based Emperor Capital Group.

A joint venture between Danone and state-owned Chinese food enterprise COFCO Corp will take an 8.3 percent stake in Mengniu, whose liquid milk products rank first in China by sales volume. That would give the French company a 4 percent holding, which it said it aimed to eventually increase.

COFCO will remain Mengniu's single largest shareholder with 27.83 percent.

Danone, the world's largest yoghurt maker with brands such as Actimel and Activa, also set up a joint venture with Mengniu for the production and sale of chilled yoghurt in China. The French firm will own 20 percent of this venture, which aims to grab a market share of around 21 percent.

Mengniu accounted for 16.8 percent of China's yoghurt market in 2012, up from 16.5 percent in 2011 and 15.9 percent in 2010, according to Euromonitor. It expects the market to grow to 53.9 billion yuan ($8.8 billion) this year and to 71.6 billion yuan by 2015, more than double its value in 2010.

Danone has been interested in expanding its presence in China for years. It pulled out of a yoghurt-making partnership deal with Mengniu more than five years ago after it failed to gain government approval and the French company said the progress was slower than it had expected.

In April, Danone reported strong first-quarter sales growth, supported by a boom in demand for baby food in Asia, particularly in China. Dairy division sales fell in Europe, where Danone plans to cut 900 jobs to cope with the economic downturn.

SHARES SURGE

Shares of Mengniu jumped as much as 11.4 percent to hit a 17-month high of HK$27.30, outpacing a 1.8 percent gain for the benchmark Hang Seng Index .HSI. The stock is now eight times above its 2004 initial public offering price of HK$3.925.

China's milk industry was battered by a 2008 scandal involving chemical-laced products that killed at least six children and sickened nearly 300,000.

Mengniu, which was one of about 20 companies implicated in that scandal, joined forces with Danish-Swedish dairy group Arla Foods in June last year to develop dairy products in China, in another bid to regain consumer confidence.

Arla said the tie-up with Danone, which competes with Nestle (NESN.VX) and Unilever (ULVR.L), would not affect its partnership with Mengniu.

"We are confident that Danone's engagement in Mengniu will increase consumers' trust in locally produced dairy products - for the benefit of all players in the Chinese dairy market," said executive vice-president in Arla Foods and Mengniu board member Finn Hansen.

Earlier this month, Mengniu bought a $410 million stake in China's largest unpasteurized milk producer from private equity firms KKR & Co LP and CDH Investments, its latest bid to rebuild trust.

($1 = 7.7629 Hong Kong dollars) ($1 = 0.7798 euros) ($1 = 6.1419 Chinese yuan)

(Reporting by Donny Kwok; Editing by Anne Marie Roantree and Stephen Coates)

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