* China dairy market is dominated by local producers
* Sales of dairy products in China forecast to grow to $89
bln by 2017
* Mengniu shares jump as much as 9.5 pct to record
(Ads analysis, quotes)
By Denny Thomas and Donny Kwok
HONG KONG, Feb 12 France's Danone SA
is spending 486 million euros ($665 million) to lift its
effective stake in China's top dairy firm, China Mengniu Dairy
Co Ltd, as it aims to boost its presence in one of its
most important markets.
The investment by the world's biggest yoghurt maker will
boost its effective holding in Mengniu to 9.9 percent from 4
percent, making it the Chinese company's second-biggest
Danone's commitment to China comes after the French company
suffered a series of setbacks last year, including being fined
for anti-competitive practices after a probe into price-fixing.
It also recalled infant formula products in Asia due to an
unfounded health scare stemming from New Zealand-based supplier
Fonterra Co-operative Group.
"Danone's willingness to pay a premium for the stake
suggests that they are bullish over the long-term prospect of
the China's dairy industry," said Alex Wong, a director at
brokerage Ample Finance Group.
Mengniu shares rallied as much as 9.5 percent to an all-time
high of HK$40.35, although the stock gave up much of those gains
as traders locked in profit from the past year's rise of more
than 65 percent.
The stock trades at 24.8 times 12-month forward earnings,
compared with 19.6 times for Hong Kong-listed food products
companies, according to data from StarMine. The average for
Asia-Pacific region sits at 18 times.
Booming Chinese demand for dairy products has sparked a raft
of M&A and IPOs in the country's dairy sector. Food-safety
scares have also boosted demand for foreign baby milk formula,
pushing Chinese dairy firms to seek ties with foreign makers.
Sales of dairy products are expected to nearly double from
2012 to 2017 to about $89 billion, according to projections by
business consulting firm Frost & Sullivan.
Danone, the maker of Bledina baby food and Volvic water,
formed an alliance with Mengniu in May 2013, under which the
companies agreed to produce and sell chilled yoghurt products in
Under the new deal announced on Wednesday, Danone and COFCO
Dairy Investment, a venture with China's state-owned COFCO, will
subscribe to a reserved rights issue by Mengniu at HK$42.5 per
share, a 15.3 percent premium to Mengniu's previous close. By
0701 GMT, the shares were trading up 3.1 percent at HK$38.00,
while the benchmark Hang Seng index was up 1 percent.
COFCO, Danone and dairy cooperative Arla Foods,
Mengniu's three core shareholders, will combine their stakes
within COFCO Dairy Investments, Danone said in a statement.
COFCO owns 16.3 percent of Mengniu and Arla owns 5.3 percent.
Danone has long aimed to establish a major presence in
China. Its first joint venture with China's largest beverage
company, Hangzhou Wahaha Group Co, fell apart in 2009 after 13
China's dairy industry is dominated by local companies
including Modern Dairy, China Huishan Dairy Ltd and
YST Dairy. Foreign players have taken a significant
role in niche markets such as milk powder after a 2008 food
Mengniu plans to use the proceeds to cut debt. Deutsche Bank
advised China Mengniu, the Chinese company said.
To see the statement please click (link.reuters.com/wuq76v)
($1 = 7.7564 Hong Kong dollars)
($1 = 0.7312 euros)
(Additional reporting by Elzio Barreto and Nishant Kumar;
Editing by Edwina Gibbs and Stephen Coates)